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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission file number: 1-14897
A.B. Watley Group Inc.
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(Name of small business issuer in its charter)
Delaware 13-3911867
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization ) Identification No.)
40 Wall Street, New York, New York 10005
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(Address of principal executive offices) (Zip Code)
(212) 422-1100
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Common Stock - $.001 par value Boston Exchange
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
The issuer's revenues for the fiscal year ended September 30, 1999 were
$20,987,613.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant on December 28, 1999 (computed by reference to the average bid and
asked prices of such stock on such date) was approximately $54,487,835.
The number of shares of common stock, par value $.001 per share, outstanding as
of December 21, 1999 was 7,931,745 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
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Forward Looking Statements: This Report contains certain statements that may be
deemed "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. All sstatements, other than
statements of historical facts, that address activities, events or developments
that the company intends, expects, projects, believes or anticipates will or may
occur in the future are forward-looking statements. Such statements are based on
certain assumptions and assessments made by management of the company in light
of its experience and its perception of historical trends, current conditions,
expected future developments and other factors it believes to be appropriate.
The forward-looking statements included in this Report are also subject to a
number of material risks and uncertainties, including but not limited to
economic, competitive, governmental and technological factors affecting the
company's operations, markets, services and prices, and other factors discussed
in the company's filings under the Securities Act and the Exchange Act.
Stockholders and prospective investors are cautioned that such forward-looking
statements are not guarantees of future performance and that actual results,
developments and business decisions may differ from those envisaged by such
forward-looking statements.
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PART I
Item 1. Description of Business.
We are a financial services company which owns A.B. Watley, Inc., a
registered securities broker-dealer and member of the National Association of
Securities Dealers, Inc. We provide real-time online financial brokerage
services and comprehensive information about the securities markets through our
proprietary trading systems, UltimateTrader(R) and WatleyTrader(TM). Watley has
received favorable industry recognition, ranking fourth in Dow Jones Business
Directory's recent survey of Internet brokers and sixth in Gomez Advisors'
ranking of Internet brokers. In addition, UltimateTrader and WatleyTrader were
ranked seventh and sixth in Barron's annual ranking of online brokers published
in March 1999.
Our company was incorporated in May 1996 under the laws of the State of
Delaware. Watley was organized in December 1958 under the laws of the State of
New York. In January 1997, we acquired all of the outstanding capital stock of
Watley.
Industry Overview
Our industry has recently experienced a series of changes, led by
electronic and online commerce, which has created market opportunities for us
and other similarly situated brokerage firms. These favorable market trends
include:
The Emergence of Electronic and Online Commerce.
Internet and online services have provided organizations and
individuals with innovative ways of conducting business. With the emergence of
the Internet as a globally accessible, fully interactive and individually
addressable communications and computing medium, companies that have
traditionally conducted business in person, through the mail or over the
telephone are increasingly utilizing electronic commerce. Increased use of
credit cards, automated teller machines, the incidence of electronic funds
transfers and online banking and bill paying has automated, simplified and
reduced the costs of financial transactions for consumers, businesses and
financial institutions.
Consumers have shown a strong preference for transacting various types
of business electronically, such as paying bills, buying insurance, booking
airline tickets and trading securities, rather than in person or over the
telephone. These transactions are being streamlined through online commerce and
can now be performed directly by individuals virtually anywhere at any time.
Consumers have accepted and even welcomed self-directed online transactions
because these transactions can be faster, less expensive and more convenient
than transactions conducted through a human intermediary.
The Development of Online Brokerage Services.
In the past, individual investors could access the financial markets
only through a full-commission broker, who would offer investment advice and
place trades. With the deregulation of brokerage commissions in 1975 and the
resulting unbundling of brokerage services, investors began to realize that they
could separate financial advisory services from securities trading. This brought
about the advent of discount brokerage firms, which provide an alternative
investment approach by completing trades at a reduced cost.
With the emergence of electronic brokerage services, investors are
being given the ability to further unbundle the costs associated with the human
interaction required by full-commission and traditional discount brokerage
firms. By requiring personnel to handle each transaction, most traditional
brokerage firms restrict their clients' access to trading and information to the
availability of the person processing the transaction. In addition, although
full-commission and discount brokerage firms are able to offer electronic
trading services, their continued reliance on personnel, branch offices and the
associated infrastructure for a major part of their business prevents them from
reducing their cost structure to the lower price points achievable through
electronic trading.
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We believe that the increased presence of automated teller machines,
the growth of discount brokerage firms, increasing utilization of the Internet
to access a wide range of financial services, and a variety of other indicators
evidence a shift in demographics that is fundamentally altering the way
consumers manage their personal financial assets. Based on consumer feedback and
the rapid acceptance by consumers of online transactions, we also believe that
consumers are increasingly taking direct control over their personal financial
affairs, not only because they are now able to do so, but also because they find
it more convenient and less expensive than relying on financial intermediaries.
As investors obtain even more access to investment information, we
believe, based upon our experience in the industry, they will desire greater
control over their financial decisions and seek alternative ways to invest more
conveniently and cost-effectively and with less interaction with brokers and
other financial services professionals. Based upon our experience in the
industry, we believe that this trend has created a growing opportunity to
provide online trading services, such as UltimateTrader(R) and WatleyTrader(TM),
that are easy to access, easy to use, cost-effective and secure.
The Growing Market for Active Traders, Active Investors and Online Brokerage
Services.
Active trading is dependent upon liquidity, i.e., the ability to buy or
sell stock at any given time. Until recently, liquidity was primarily provided
by Nasdaq, The New York Stock Exchange and an alternative trading system called
Instinet. However, the liquidity on Instinet was available only to institutional
clients and certain brokerage firms.
In 1996, the SEC adopted rules which brought about sweeping changes in
the structure of the over-the-counter market and were very beneficial for us and
our clients, as well as to public companies and their shareholders. These rules,
known as the order handling rules, permitted the creation and operation of
electronic communication networks, open broadcasting systems that allow anyone
with a connection to the network to see all the bids and offers posted into the
system for any Nasdaq traded security. The order handling rules require market
makers to display certain limit orders in their quotations or to send those
orders to an electronic communication network for display. The increased
regulatory emphasis on enforcing compliance with the duty of brokers to obtain
the best execution for their clients has fostered the growing importance of
electronic communication networks, which provide an ever-increasing source of
liquidity in the over-the-counter market.
Based upon our experience in the industry, we believe that this
regulatory environment and the increased availability of information to
individual investors on a real-time basis, together with advances in Internet,
networking and communications technologies, has created investing opportunities
for active traders and active investors and market opportunities for online
brokerage services.
Online trading is the fastest growing segment of the brokerage industry
and is expected to grow significantly. The evolution of the Internet has
fundamentally changed the way in which many investors manage their financial
affairs. The speed, convenience, choice, cost savings and information that the
Internet offers as an investment tool has driven investor assets online. We
anticipate a continuation in this trend as evidenced by research released by
Forrester Research and IDC. These independent research firms project that total
U.S. assets managed online will reach $3.1 trillion in 2003, up from $325
billion at the end of 1998. During that period, the number of online accounts is
estimated to roughly quadruple, to over 20 million. Also, the percentage of all
investors who invest online is expected to grow to 30% from roughly 10% today.
Meanwhile, according to The Industry Standard, within the past four years online
trades as a percent of total trading volume have gone from less than 1% to 14%
of all stock orders and 30% of the volume on Nasdaq and the NYSE. According to
one industry analyst, the online trading volume could represent 50% of all
trades over the next three years.
Strategy
Our strategy, which has been accelerated since our initial public
offering in April 1999, is to capitalize on perceived opportunities arising from
the expanding online trading market by:
o Targeting active traders and other active investors. We believe that
UltimateTrader is well positioned to satisfy their requirements. We
have established low rates and offered a broad range of
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supplementary information and data for these persons.
o Expanding our marketing efforts for our online brokerage service. We
are aggressively marketing UltimateTrader by targeting active traders
through print, online and other advertisements. Our advertising efforts
include advertisements in financial publications and various other
regional and national publications that have a demographic similar to
our target market. We are also advertising and promoting UltimateTrader
through Internet website and banner advertisements and other media. Our
marketing campaign has accelerated throughout fiscal year 1999,
especially during the 4th quarter. Our continued investment in the
content and services provided via our Internet site and the
WatleyTrader service has earned strong rankings for our company in
several major industry surveys such as #6 in the Gomez Advisors Review
and #7 in both Barron's and Time Magazine. Such rankings have given us
very valuable publicity and strengthened our brand in a very
competitive marketplace.
o Expanding our network infrastructure and client support capabilities.
We are expanding our network infrastructure and client support
capabilities, to better service an increasing client base. Our internal
computing needs require ongoing investments in our network and server
infrastructure. During fiscal year 2000, we also intend to establish an
off-site back-up communications center or hot site, in a different
region of the country, to mirror the primary location to ensure
continued operations in the event of a systems failure at our primary
location.
o Improving our third-market institutional sales desk. We are
continuously seeking to improve our technical expertise and apply new
technologies to more effectively provide these services. Additionally,
we have hired additional associates to expand the number of
institutions we service and the number of securities we cover for this
market.
In addition, we intend to expand our operations by:
o Converting to self-clearing operations. Based upon an internal
cost/benefit analysis we believe that performing these operations
internally will reduce our operating cost and provide us the
opportunity to receive expanded revenues from margin transactions with
our clients. We have completed this review and are seeking to hire the
appropriate staff to build and manage our own clearing department. We
have hired a new senior officer from a very large competing firm who
has over 12 years of experience in managing self-clearing operations
and conversions to self-clearing. We have identified and are seeking to
obtain, by internal development or third party license, the requisite
software systems and computer hardware to convert to self-clearing
operations in the not too distant future.
o Offering online services in foreign markets. We have started to provide
electronic execution services for foreign institutions and their
clients for transactions in U.S. securities markets and to arrange for
foreign institutions to provide for these services for our clients in
foreign markets. We are actively pursuing these relationships in the
Far East and Europe, with the goal of an eventual global securities
presence.
Ultimate Trader
We designed UltimateTrader by uniquely integrating third-party market
data and order entry software with our proprietary networking systems to create
a proprietary trading system.
Since UltimateTrader is a client-server application, it is not
restricted by the limitation of HTML, the primary programming language of the
worldwide web. With trading systems which use HTML, displayed data remains
static until a query is repeated. In contrast, UltimateTrader delivers and
automatically updates a continuous, dynamic stream of live market date to the
client's screen.
UltimateTrader provides our clients access to comprehensive information
on stocks, market, indices, mutual funds, news and options. UltimateTrader
clients are able to access bid and ask prices, charts, research and over 170
other types of information for any listed or Nasdaq traded stock, as well as the
ability to establish and track their securities, cash and margin positions on a
real-time basis. Our clients can arrange the display and configuration
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of data on their computer screens using a menu and tool bar, which are generally
utilized in the Windows operating system. Different computer screen arrays or
pages can be built to suit the user's personal requirements.
UltimateTrader clients can execute trades with a few simple mouse
clicks or keystrokes. UltimateTrader clients can route trades directly to the
exchanges, the Nasdaq Market Maker System, a specific market maker or an
electronic communication network. As a result, we believe trades can be executed
more quickly than if the trade is routed through a third market firm or an
online brokerage firm's trading desk, as is the case with a number of other
trading systems. The order entry section can be preset for size and type of
order. The client can use a mouse to click the bid or ask price of a security
and either close out an open position or add to an existing one. If the user
clicks the bid or ask price of the security, the order screen will appear
pre-configured to buy or sell.
Once an order is entered, UltimateTrader sends the order to the
exchange selected in less than two seconds from virtually anywhere in the world.
Typical executions for market orders entered via Ultimate Trader range from 2
seconds to 10 seconds depending on market conditions. These significant savings
in time have tremendous value to a client who is trying to trade in markets
characterized by rapidly changing prices.
Speed of order execution is also affected by how an order is routed.
UltimateTrader clients are able to route their orders directly to the exchanges,
such as the New York Stock Exchange, American Stock Exchange, Nasdaq Stock
Market, Inc. and Chicago Board Options Exchange. Most other retail online
trading systems route orders to a third-market firm or the online broker's
trading subsidiary, which in turn routes the orders to the market.
Clients can also elect to route trades to our Watley trading desk for
efficient execution. Our Watley trading desk consists of registered
representatives who are available to assist our clients.
UltimateTrader clients may place bids or offers onto an electronic
communication network which will also appear in the Nasdaq Market Maker Level 2
screen with the corresponding price and size of the order. This gives our
clients an advantage in attempting to execute orders in between the bid and
asked prices of Nasdaq securities.
To direct an order to a specific market maker or electronic
communication network, our clients double click on the market maker or ECN and
mark their order entry screen with this preference. The SelectNet preference
button is useful when our clients wish to execute orders for more than 1,000
shares of a security.
UltimateTrader clients can select from two different service levels,
UltimateTrader Free and UltimateTrader Pro. Our UltimateTrader Free Level II
service has been only recently introduced and promoted after the end of our most
recent fiscal year.
The following table sets forth the features offered for UltimateTrader
Free and Pro Service Level:
Ultimate Trader
Features Free Pro
Dynamic Updating Quotations ............................ X X
Unlimited Customized Pages ............................. X X
Electronic Execution ................................... X X
Buying Power ........................................... X X
Board View Portfolio Minder ............................ X X
Position Minder ........................................ X X
Scrolling Tickers ...................................... X
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Alarms ................................................. X
Snap Quotes ............................................ X
Market Minder .......................................... X
Hot Keys ............................................... X X
MultiQuotes ............................................ X
Charts with Technical Studies .......................... X
Nasdaq Level II Data ................................... X X
Color Coded Market Maker Screens ....................... X
Time and Sales ......................................... X X
Following is a description of each of the UltimateTrader features we
offer:
o Dynamic Updating Quotations - displays real time changes in prices and
markets as they occur.
o Unlimited Customized Pages - allows clients to create computer screen
layouts to their preference with their data and to scroll freely among
these pages.
o Electronic Execution - provides direct electronic access to various
exchanges and markets for rapid routing of execution of trades.
o Buying Power - allows clients to view current buying power, the value
of the account as of the trading day's business morning.
o Board View Portfolio Minder - used to create computer windows with
comprehensive price and other data relating to a number of different
securities.
o Position Minder - serves as a portfolio monitor and displays existing
open positions as well as the status of pending orders.
o Scrolling Tickers - displays price and trading volume information for
the symbols that a client chooses on a live basis. The quotes will move
through the ticker window as the server receives them.
o Alarms - alerts clients by an audio or visual pop-up when target
criteria have been met for a specified security.
o Snap Quotes - displays detailed information about individual symbols.
o Market Minder - a fully configurable quote screen that can display
virtually any information about the security selected by the client.
o Hot Keys - the ability to execute/cancel trades with a simple
keystroke.
o MultiQuotes - displays prices and fundamentals for any symbol.
o Charts with Technical Studies - allows clients to view live,
dynamically updating, real-time intraday chart data and historical
information for stocks, option or indices.
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o Nasdaq Level II Data - continuously updated display of market maker and
electronic communication network current prices and changes.
o Color Coded Nasdaq Market Maker Screens - designed to visually display,
by a special color on the screen, upward and downward trends in recent
trades in a security.
o Time and Sales - reflects last and cumulative trades, prices and
aggregate daily volume in a security.
Our fee schedule for clients subscribing to UltimateTrader Free is as
follows:
Number of Trades Per Month Transaction Charges Monthly Fees for Real Time Data
- -------------------------- ------------------- -------------------------------
1-9 trades per month $23.95 free
10-24 trades per month $22.95 free
25-49 trades per month $20.95 free
50-99 trades per month $19.95 free
100-199 trades per month $18.95 free
Our fee schedule for clients subscribing to UltimateTrader Pro is as
follows:
Number of Trades Per Month Transaction Charges Monthly Fees for Real Time Data
- -------------------------- ------------------- -------------------------------
1-9 trades per month $23.95 $300
10-24 trades per month $22.95 $250
25-49 trades per month $20.95 $200
50-99 trades per month $19.95 free
100-199 trades per month $18.95 free
Dow Jones News Service is an optional service priced at $95.00 per
month.
Watley's fee for an exchange listed security in excess of 2,000 shares
or a Nasdaq listed security in excess of 10,000 shares incur a surcharge of $.01
per share and a commission of $.01 per share on the entire order. We also charge
an additional fee for executing on an electronic communication network or
SelectNet, substantially all of which is forwarded to the owner or operator of
that system.
Optional Services. We offer a vast array of optional services to
UltimateTrader clients. Among these are the Dow Jones News Service and various
charting and market trading services. The Dow Jones News Screen provides
continuously updating real-time news in a scrolling format, including: breaking
news; corporate announcements; interviews; industry news; market reports;
economic and political developments; hot stock alerts; and international events.
With Dow Jones News and a number of other services, we invoice the
client directly as part of their monthly bill and remit the special charges to
the vendor supplying these services, while retaining approximately 15% of the
charge as our fee.
UltimateTrader has accounted for most of our retail customer account
revenues in the past year and we anticipate this to continue in the future.
During our fiscal year ended September 30, 1999, we derived approximately 71% of
our total revenues from UltimateTrader clients.
WatleyTrader
WatleyTrader is our web-based Internet brokerage service which we
designed for active investors who execute trades online and use online services
to gather information about the securities markets. WatleyTrader provides
comprehensive information on stocks, markets, indices, mutual funds, news and
options in a live format for free. WatleyTrader clients can place trades, obtain
quotes, order research and check account balances and portfolio
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valuations online or through our automated touch-tone phone system, 24 hours a
day. The electronic order system for the WatleyTrader directs orders to the
Watley Desk for execution. WatleyTrader client orders are entered, processed and
confirmed electronically.
WatleyTrader targets price sensitive investors and competes directly
with E*Trade, Charles Schwab and other online brokerages. The basic fee schedule
for the WatleyTrader is a transaction charge of $9.95 per order with an
additional $14.00 fee for trades made by telephone. Orders of more than 5,000
shares bear a commission of $.01 per share for the entire order.
During our fiscal year ended September 30, 1999, approximately 3% of
our revenues originated from WatleyTrader clients.
Third-Market Institutional Sales Desk
Watley's third-market institutional sales desk specializes in
facilitating and/or executing large-block transactions in approximating 500
thinly traded equity securities. These services are provided to clients who
often require that their purchases or sales of large positions remain anonymous.
We match buyers and sellers to execute off-exchange transactions, to minimize
the impact on the market and prevent our client's positions from being disclosed
to competing firms. Our third-market institutional sales clients include mutual
and pension funds, insurance companies, banks, corporations and independent fund
managers. Approximately 22% of our revenues for our fiscal year ended September
30, 1999 were derived from the institutional trading desk.
Client Services
Client services for all levels of online service, including trading,
administrative, and technical support, are among our highest priorities. Based
on our experience in the industry and client feedback, we believe that providing
an effective client service team to handle client needs is critical to our
success. Our Client Service department helps clients get online, handles product
and services inquiries and addresses all brokerage and technical questions. The
Client Service department also conducts various surveys to verify the
satisfaction of our clients and to learn more about client preferences and
requirements.
Live client support is available 12 hours a day from 8:00 AM to 8:00 PM
EST Monday through Friday. Our client services department operates on a one-stop
shopping basis, meaning that clients do not typically have to be transferred
between departments to receive answers to their inquires. We currently employ
seventeen Client Service personnel (inclusive of management), all of whom are
registered representatives and are available to accept and execute client
orders, research past trades, discuss account information, and provide detailed
technical support. A separate technical support team helps clients with
particularly serious or persistent technical issues.
In order to provide professional and efficient client support, we have
purchased and implemented client relationship management (CRM) and computer
telephony integration (CTI) software. CRM databases are updated with each client
contact to track client service calls. A separate internal database tracks
trading patterns, changes in customer balances and compliance issues. Both
databases are used to generate periodic reports for management. Client services
associates access the latest product and account information through CRM and
customer account databases.
During the second quarter of fiscal year 1999, we launched online
support and chat services for our clients. This service currently offers an
online, indexed UltimateTrader user manual and chat area. The chat area offers
clients the ability to query and chat with client services associates in
real-time. Our goal with respect to the provision of online support and chat
services is to create a sense of virtual community among prospective and
existing clients and between our company and our clients. We are planning to
upgrade our online support capabilities through a recently acquired online chat
support software package.
We plan to create a VIP client services team to service our most active
online clients. By providing client support for all issues on an account manager
basis, we intend for the VIP team to offer much more individualized service on a
prioritized basis. We believe that providing highly prioritized, personalized
and professional client support, especially for our niche market high volume
clients, will further differentiate our products and services
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from those of our competitors.
Operations
Clearing and Order Processing
Watley does not hold any funds or securities of its clients nor does
Watley generally execute and process directly either its own or its clients'
securities transactions. Since October 1996, Watley has cleared all transactions
for its clients, on a fully disclosed basis, with Penson Financial Services,
Inc. for retail accounts and Weiss, Peck & Greer, L.L.C. for institutional
accounts.
Watley's agreement with its clearing brokers provide that the clearing
brokers process all securities transactions for Watley's account and the
accounts of Watley's clients for a fee. Services of the clearing brokers include
billing and credit control and receipt, custody and delivery of securities, for
which we pay a per ticket charge. Watley has agreed to indemnify and hold the
clearing brokers harmless from certain liabilities or claims, including claims
arising from the transactions of its clients, which could be material in amount.
Watley's clearing agreements may be terminated by either party, upon 60 days'
written notice for Penson Financial Services, Inc., and 30 days prior written
notice for Weiss, Peck & Greer, L.L.C. Watley depends on the operational
capacity and the ability of the clearing brokers for the orderly processing of
transactions. By engaging the processing services of clearing brokers, however,
Watley is exempt from certain capital reserve requirements imposed by federal
laws.
Clients' securities transactions are effected on either a cash or
margin basis. In connection with margin transactions, credit is extended to a
client, collateralized by securities and cash in the client's account, for a
portion of the purchase price. The client is charged for margin financing at
interest rates based on the brokers call rate plus an additional amount of up to
1.75%. The brokers call rate is the prevailing interest rate charged by banks on
secured loans to broker-dealers.
Margin lending is subject to the margin rules of the Board of Governors
of the Federal Reserve system. Margin lending subjects us to the risk of a
market decline that would reduce the value of our collateral below the client's
indebtedness before the collateral can be sold. Under applicable rules, in the
event of a decline in the market value of the securities in a margin account,
the client is required to deposit additional securities or cash in the account.
Network Infrastructure
Our network consists of a series of servers, routing and
Internet-networking equipment, workstations, software support cluster, and
firewall management systems. This creates a global connection to our intranet,
so that any computer that can connect to the Internet can connect to our system.
Any individual with a personal computer who has a connection to the
Internet and has Windows compatible software can subscribe to UltimateTrader.
Once an account is opened, the client downloads UltimateTrader software and is
given a unique user name and password. The client then logs onto the
UltimateTrader system and is connected to our market data servers and to one of
our order servers.
Our network is accessed by electronic messaging. A message is sent to
Watley's network via the client's Internet service provider. In order to access
Watley's network, this message first passes through a firewall and web shield.
The firewall only allows appropriate Internet traffic into the network. The web
shield prevents virus-infected files or messages from reaching the network. Once
the message has passed through the firewall and web shield, a permission server
qualifies the client. Once the permission server allows the client to establish
a connection to the UltimateTrader system, the connection between the client and
server is maintained until the client requests it be terminated or until the
UltimateTrader system determines that the connection is no longer efficient or
is inoperable.
Our technology is supported by an internal staff of programmers,
developers and operators 24 hours a day, seven days a week. The programming
staff is supplemented by a team of quality control analysts, web page
developers, technical writers and design specialists who ensure the final
product is user-friendly and dependable. In addition to supporting the systems,
the staff continually enhances software and hardware and develops new services.
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Software is designed to be versatile and easily adaptable to new and emerging
technologies.
The order servers accept buy/sell or sell short messages from the
client application and qualifies the order according to a number of business
rules. Once an order is qualified, it is sent to the exchange of the client's
choice and messages are sent to update our database. This update offers the
client real-time account positions, buying power and profit and loss
calculations. All transactions for the day are processed for delivery to the
clearing firm.
Account Security
We use a combination of proprietary and industry standard security
measures to protect our clients' assets. Clients are assigned unique account
numbers, user identifications and passwords that must be used each time they log
on to the system. In accordance with standard industry practices, telephone
orders require authentication via personal identification number/password and/or
other personal information. In addition, our trade processing system is designed
to compare the Watley accounts database with the clearing firm's account
information on a daily basis to detect any discrepancies.
We rely on encryption and authentication technology, including public
key cryptography technology licensed from other parties, to provide the security
and authentication necessary to effect the secure exchange of information.
Firewalls and other software limit not only system access to the
authorized users, but also limit the authorized users to specifically approved
applications. This filter-software prevents unauthorized access to critical
areas of the system such as account information. Furthermore, public access
servers, such as e-mail, chat services and the file transfer protocol, are in a
network entirely separate from the rest of our systems.
We have implemented special policies relating to the transfer or
withdrawal of funds by clients to prevent unauthorized withdrawals. All requests
for fund withdrawal or transfer require a signed letter from the account holder.
Checks will only be made out in the account holder's name and wire transfers
will only be sent to a bank account in the account holder's name.
Investment Considerations and Risk Factors
Although we are optimistic that we will be able to continue our
substantial growth and strengthen our position in the online and electronic
trading of securities, we also acknowledge that our business and this industry
in general are subject to a number of risks and uncertainties, which could
adversely affect future results. Among these are:
1. Competition In The Online And Electronic Brokerage Business Is
Increasing. Not only are we faced with competing with the traditional electronic
trading firms, such as E-Trade and E-Schwab, as well as smaller sized
competitors, but we are also faced with the entry of new firms, including
traditional brokerage firms such as Merrill Lynch, and the emergence of giants,
such as Goldman Sachs & Co., as a sponsor or joint venturer of e-commerce
brokerage firms and electronic communications networks. We will continue to
compete based upon what we perceive as the excellence of our trading systems,
the skills of our customer service personnel, the breadth of information and
other services provided, attractive pricing of our services and maintenance and
upgrade of our technology. Although added competition has also served to
increase the overall market for this type of brokerage service, the increased
competition also places more pressure on us in our competitive efforts,
including a need to increase our marketing efforts, which is already underway.
2. We Are Expanding Rapidly And Need to Properly Manage Our Increased
Infrastructure. The expansion of our business has led us to increase our systems
and personnel. These must be managed efficiently and places additional burdens
upon executive management.
3. We Must Maintain Our Access To The Most Improved Technology.
Technological changes continue in the electronic commerce field generally and in
our segment of online brokerage. We must keep pace with these technological
developments by a combination of licensing and developing software, to be able
to continue to provide what we regard as highly efficient and attractive
services and systems for our accounts.
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4. Our Industry Faces Substantial Regulatory Supervision. We, as well
as all members of the U.S. securities brokerage industry, are regulated by the
NASD and SEC. These supervisory bodies have tended to increase the intensity of
their regulatory efforts, particularly with respect to the online trading
industry. Additional regulations have been proposed, from time to time, dealing
with the suitability of online trading and broker supervision of accounts. All
these place a greater burden on the conduct of our electronic and online
brokerage business.
5. Our Proposed Conversion To Self-Clearing Operations Subjects Us to
Additional Risks. Although self-clearing will allow us to theoretically increase
the profitability of our operations, it will also place additional burdens upon
managing our business. We will collect dividends and interest on securities held
in nominee name and make the appropriate credits to our client's account. We
will also facilitate exercise of subscription rights on securities held for our
clients. We will arrange for the transmittal of proxy and tender offer materials
and issuer reports to our clients.
Self-clearing operations, especially where conducted by firms such as
ours, without significant prior experience, involve substantial risk of losses
due to clerical errors related to the handling of client funds and securities.
We have attempted to mitigate this risk by hiring, from a large competitor, as a
senior officer someone who has extensive experience in the senior management of
self-clearing operations and conversions to self-clearing. Errors in the
clearing process also may lead to civil liability for actions in negligence
brought by parties who are financially harmed as a result of these errors.
Clearing operations have accounted for a significant portion of our cost of
services. Our failure to perform self-clearing operations accurately and
cost-effectively could have a material adverse effect on our business, financial
condition and operating results.
Suppliers
We obtain financial information from a number of third-party suppliers
of software and information services, including PC Quote, Inc., Townsend
Analytics, Ltd., Ethos Corporation and S&P ComStock, Inc. We have a number of
alternative sources of supply of these items of software and information
services available to us at comparable cost, on a timely basis to provide
adequate replacements, if arrangements with any of our current suppliers are
abrogated.
Marketing and Advertising
We are marketing UltimateTrader by targeting active traders through
print, online and other modes. To date, we have engaged in limited marketing and
advertising efforts, consisting primarily of print advertising in Investors
Business Daily, a daily trade publication. We have also conducted surveys of our
existing client base to understand their media consuming habits and demographics
profiles to effectively target our advertising campaign. We are developing a
comprehensive marketing plan to attract potential clients, as well as build
market awareness, educate the investing public and develop brand name
recognition and loyalty within the most active trading segment of the market.
Our advertising efforts are expected to include advertisements in financial
publications and various other regional and national publications that have
demographics similar to our target market. We also intend to advertise and
promote UtimateTrader through Internet website and banner advertisements and
television commercials. We also plan to broaden our presence on the Internet
through various partnerships, sponsorships and co-branding efforts such as our
recent deal with U-Cool, an Internet community site that has over 150,000
subscribers and 10 million unique monthly visitors. Our strong rankings in
various industry surveys have provided us with extremely valuable publicity. We
will continue to make investments in our online services and offerings to
maintain and even strengthen these rankings.
Our initial marketing efforts will be concentrated in the United
States. However, as part of our long-term goals, we plan to market our services
to trading communities interested in U.S. equities in Western Europe, Latin
America, and Asia.
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Competition
The market for electronic brokerage services is highly competitive and
rapidly changing. We believe that we compete on the basis of speed of order
execution, processing and confirmation, quality of client service, ease of use,
amount and timeliness of information provided, price and reliability of our
trading systems. We expect that our ability to compete will also be affected by
our ability to introduce new services and enhancements to existing services into
the market on a timely basis.
We believe our competition consists of large and small brokerage firms,
utilizing the Internet to transact retail brokerage business. Among these
competitors are E*Trade Group, Inc.; Charles Schwab & Co., Inc.; Quick & Reilly,
Inc.; Waterhouse Securities, Inc.; Fidelity Brokerage Services, Inc. and Datek
Securities Corp. We also face competition for clients from full commission
brokerage firms, including Merrill Lynch & Co., Inc.; Morgan Stanley Dean Witter
& Co.; PaineWebber Incorporated; and Salomon Smith Barney, as well as financial
institutions and mutual funds.
Securities Regulation
Watley is a broker-dealer registered with the SEC and NASD and is
licensed as a broker-dealer in 49 states.
The securities industry in the United States is subject to extensive
regulation under federal and state laws. In addition, the SEC, NASD, other self
regulatory organizations, such as the various stock exchanges, and other
regulatory bodies, such as state securities commissions, require strict
compliance with their rules and regulations. As a matter of public policy,
regulatory bodies are charged with safeguarding the integrity of the securities
and other financial markets and with protecting the interests of clients
participating in those markets, and not with protecting the interests of our
stockholders.
Broker-dealers are subject to regulations covering all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of clients funds and securities, capital
structure, record keeping and the conduct of directors, officers and employees.
Because of the recent increase in the number of complaints by online traders,
the SEC, NASD and other regulatory organizations may adopt more stringent
regulations for online firms and their practices. If we fail to comply with any
laws, rules or regulations we could be censured, fined, issued a
ceased-and-desist order or Watley or our officers and employees could be
suspended or expelled.
In addition, significant changes in Watley's current business or
practices, including converting to self-clearing operations, require NASD and
other regulatory approval.
To expand our services internationally, we would have to comply with
regulatory controls of each specific country in which we conduct business. The
brokerage industry in many foreign countries is heavily regulated. The varying
compliance requirements of these different regulatory jurisdictions and other
factors may limit our ability to expand internationally.
We intend to initiate a comprehensive marketing campaign to bring
greater brand name recognition to our products and services. All marketing
activities by Watley are regulated by the NASD. The NASD can impose penalties,
including censure, fine, suspension of all advertising, the issuance of
cease-and-desist orders or the suspension or expulsion of a broker-dealer and
its officers or employees for violations of the NASD's advertising regulations.
Net Capital Requirements
The SEC, NASD and various other regulatory agencies have stringent
rules requiring the maintenance of specific levels of net capital by securities
brokers, including the SEC's uniform net capital rule which governs Watley. Net
capital is defined as assets minus liabilities, plus other allowable credits and
qualifying subordinated borrowings less mandatory deductions that result from
excluding assets that are not readily convertible into cash and from valuing
other assets, such as a firm's positions in securities, conservatively. Among
these deductions are adjustments in the market value of securities to reflect
the possibility of a market decline prior to disposition.
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As of September 30, 1999, Watley was required to maintain minimum net
capital, in accordance with SEC rules, of approximately $135,974 and had total
net capital of $4,178,815 or approximately $4,042,841 in excess of minimum net
capital requirements.
If Watley fails to maintain the required net capital Watley may be
subject to suspension or revocation of registration by the SEC and suspension or
expulsion by the NASD and other regulatory bodies, which ultimately could
require Watley's liquidation. In addition, a change in the net capital rules,
the imposition of new rules, a specific operating loss, or any unusually large
charge against net capital could limit those operations of Watley that require
the intensive use of capital and could limit our ability to expand our business.
The net capital rules also could restrict our ability to withdraw capital from
Watley, which could limit our ability to pay dividends, repay debt and
repurchase shares of our outstanding stock.
Intellectual Property Rights
We rely on a combination of copyright, trademark and trade secrets laws
and non-disclosure agreements to protect our proprietary technologies, ideas,
know-how and other proprietary information. We hold a United States trademark
registration for the UltimateTrader name. We have no patents or registered
copyrights. Third parties may copy or otherwise obtain and use our proprietary
technologies, ideas, know-how and other proprietary information without
authorization or independently develop technologies similar or superior to our
technologies. In addition, the confidentiality and non-competition agreements
between us and our key employees, distributors and clients may not provide
meaningful protection of our proprietary technologies or other intellectual
property in the event of unauthorized use or disclosure. Policing unauthorized
use of our technologies and other intellectual property is difficult,
particularly because the global nature of the Internet makes it difficult to
control the ultimate destination or security of software or other data
transmitted.
There has been substantial litigation in the software industry
involving intellectual property rights. We believe that our technologies and
trading systems have been developed independent of others. Third parties may
assert infringement claims against us and our technologies and trading systems
may be determined to infringe on the intellectual property rights of others.
Research and Development
During the years ended September 30, 1999 and 1998, we spent
approximately $6,000,000 and $602,000 for software development. We are expecting
to incur an additional $2,000,000 in software development costs to complete our
current projects. We anticipate completion of the software under development in
the first half of fiscal 2000. These software development efforts are related
to enhancing the operational capabilities of our trading systems.
Computer Strategies, Inc. Acquisition
Effective October 2, 1998, we acquired all of the capital stock of
Computer Strategies, Inc. for 38,260 shares of common stock valued at $183,648.
Computer Strategies provided computer software consulting services. Leon
Ferguson was the founder and sole stockholder of Computer Strategies and became
our Senior Vice President and Chief Information Officer upon closing of the
acquisition.
Personnel
As of December 3, 1999, we employed a total of 127 persons, of whom 11
are engaged in executive management, 20 in trading activities, 44 in information
technology, 17 in client service, 7 in sales and marketing, 13 clerical and back
office personnel, as well as 14 other employees. All but one of these persons
are employed on a full-time basis. In addition, we retain a computer development
and consulting firm on an exclusive basis. We believe our relations with our
employees are generally good and we have no collective bargaining agreements
with any labor unions.
Our registered representatives are required to take examinations
administered by the NASD and state authorities to be qualified to transact
business, and are required to enter into agreements with Watley obligating
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them to adhere to Watley's supervisory procedures and not to solicit customers
in the event of termination of employment. Watley's agreements with registered
representatives do not obligate these representatives to be associated with
Watley for any length of time.
Our success will depend, in part, on our ability to hire and retain
additional qualified marketing, industry, technical and financial personnel.
Qualified personnel are in high demand. We face considerable competition from
other brokerage and financial service firms and other Internet and online
service companies for these personnel, many of which have significantly greater
resources that we have.
Item 2. Description of Property.
Our principal offices are located at 40 Wall Street, New York, New
York, where we occupy approximately 19,000 square feet at an annual cost of
approximately $480,000, or $40,000 per month, plus escalations. During the
fiscal year ending September 30, 2000, we will occupy additional space at 40
Wall Street of approximately 24,000 square feet at an additional annual cost of
approximately $730,000, plus escalations. The initial term of the lease for such
office space expires in June 2009. We also occupy approximately 16,000 square
feet at an annual cost of $204,000 in Allen, Texas. The initial term of the
lease for such space expires in June 2004.
Item 3. Legal Proceedings.
Our business involves substantial risks of liability, including
exposure to liability under federal and state securities laws in connection with
the underwriting or distribution of securities and claims by dissatisfied
clients for fraud, unauthorized trading, churning, mismanagement and breach of
fiduciary duty. In recent years, there has been an increasing incidence of
litigation involving the securities industry, including class actions which
generally seek rescission and substantial damages.
In the ordinary course of business, we and our principals are, and may
become, a party to legal or regulatory proceedings or arbitration. We are not
currently involved in any legal or regulatory proceedings or arbitration, the
outcome of which is expected to have a material adverse effect on our business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended September 30, 1999.
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Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Trading in the Company's shares of common stock presently takes place
on the small capitalization market of NASDAQ, under the symbol ABWG.
The following table sets forth the range of high and low sales prices
for the Company's common stock since April 20, 1999, the date we
completed our initial public offering.
Fiscal 1999: High Low
------------ ---- ---
4/20/99 - 6/30/99 $23.25 $10.375
7/01/99 - 9/30/99 $15.62 $ 8.375
(b) The number of holders of the Company's common stock was approximately
109 on December 1, 1999, computed by the number of record holders,
inclusive of holders for whom shares are being held in the name of
brokerage houses and clearing agencies.
(c) The Company has not paid a cash dividend since inception.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere herein.
Results of Operations
Fiscal year ended September 30, 1999 compared to fiscal year ended September 30,
1998
Total revenues for fiscal 1999 were $20,987,613, an increase of 130.1%,
as compared to revenues of $9,119,268 for fiscal 1998. Revenues from commissions
increased by $8,795,799, or 118.8% from $7,403,059 for fiscal 1998 to
$16,198,858 for fiscal 1999 due primarily to the significantly increased number
of online trades executed as well as due to the growth in our third market
institutional sales division. During fiscal 1999, the Company's online brokerage
division had total billed transactions of 656,217 and average billed
transactions of 2,604 per day, an increase of 310.7% compared to an average
daily billed transaction rate of 634 per day during fiscal 1998 totaling 159,789
billed transactions. Data service revenues increased by $978,887, or 148.0% from
$661,236 for fiscal 1998 to $1,640,123 for fiscal 1999 due to the increase in
the number of online accounts. We experienced an increase in the number of
online brokerage accounts from approximately 900 at September 30, 1998 to
approximately 3,500 at September 30, 1999. We expect the number of accounts and
corresponding revenue to increase during fiscal 2000 but the extent of these
increases is dependent on market conditions and the relative success of our
sales and marketing efforts. Revenues from principal transactions increased by
$1,554,985, or 172.4%, from $901,889 for fiscal 1998 to $2,456,874 for fiscal
1999, mainly as a function of the significantly higher volumes of business
conducted by both the online brokerage division's trading desk and the
third-market institutional sales division. Interest and other income increased
from $146,704 for fiscal 1998 to $685,578 for fiscal 1999.
As a result of the foregoing, net revenues increased by $11,779,210, or
132.9%, from $8,859,946 for fiscal 1998 to $20,639,156 for fiscal 1999. Nearly
all of our revenues were generated by clients in the United States and no single
group of related clients accounted for 10% or more of our revenues.
Interest expense increased from $244,322 for fiscal 1998 to $333,457
for fiscal 1999 as a result of
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increased borrowings.
Total expenses increased by $11,751,548, or 123.9%, from $9,479,591 for
fiscal 1998 to $21,231,139 for fiscal 1999. Clearing charges and floor brokerage
represent payments to our clearing and floor brokers and to certain employees
who facilitate our clients' transactions. As a result of the large increase in
the volume of business conducted by our online trading accounts, such expenses
increased by $4,542,040, or 132.6%, from $3,425,725 for fiscal 1998 to
$7,967,765 for fiscal 1999. Employment compensation and related costs increased
by $3,058,627, or 136.1%, from $2,247,963 for fiscal 1998 to $5,306,590 for
fiscal 1999, largely due to the hiring of 95 new employees to service the growth
in our client base. Communications expense increased by $479,058, or 63.3%, from
$757,391 for fiscal 1998 to $1,236,449 for fiscal 1999 as a function of the
growth in our online trading accounts. We expect that the foregoing expenses
will continue to increase as we expand our client base.
Business development costs consist primarily of advertising costs to
obtain new accounts, which have mostly been for print and media advertising.
These expenses increased by $1,035,721, or 105.6%, from $980,651 for fiscal 1998
to $2,016,372 for fiscal 1999 as the Company increased its planned advertising
and promotional efforts. We anticipate that this percentage increase will
accelerate and increase substantially in light of our plans to more aggressively
market our services in an attempt to obtain additional accounts.
Professional services increased from $971,494 for fiscal 1998 to
$1,532,994 for fiscal 1999 due to the general growth in our business. Occupancy
and equipment costs increased by $1,462,911, or 329.3%, from $444,169 for fiscal
1998 to $1,907,080 for fiscal 1999, primarily due to the relocation of our
offices to a new, 19,000 square foot facility and the leasing of additional
equipment to increase our capacity and to facilitate the relocation efforts.
Depreciation and amortization increased by $257,981, or 71%, from $363,207
fiscal 1998 to $621,188 for fiscal 1999 for similar reasons. Other expenses
increased by $353,710, or 122.3%, from $288,991 for fiscal 1998 to $642,701 for
fiscal 1999 due to our overall growth.
The income tax provision increased from $12,765 for fiscal 1998 to
$32,494 for fiscal 1999.
An extraordinary loss of $177,125 was recorded as a result of an early
retirement of $500,000 of debt. The extraordinary loss was comprised of a $5,000
prepayment penalty and unamortized option costs of $172,125.
As a consequence of the foregoing, our operating results before
extraordinary loss were essentially unchanged on a substantially higher volume
of business after significant investments in infrastructure in fiscal 1999. The
Company suffered a loss of $632,410 for fiscal 1998 as compared to a loss before
extraordinary loss on early extinguishment of debt of $624,477 and a net loss of
$801,602 for fiscal 1999.
Fiscal year ended September 30, 1998 compared to fiscal year ended September 30,
1997
Revenues for fiscal 1998 were $9,119,268, an increase of 101.2%, as
compared to revenues of $4,532,532 for fiscal 1997. Revenues from commissions
increased by $3,385,272, or 84.3%, from $4,017,787 for fiscal 1997 to $7,403,059
for fiscal 1998 due to the substantially increased volume of orders transacted
by our online brokerage clients, as well as through our third-market
institutional sales desk. We experienced an increase in the number of online
trading accounts from approximately 300 at September 30, 1997 to approximately
900 at September 30, 1998. Data service revenues also increased by $512,883, or
345.7%, from $148,353 for fiscal 1997 to $661,236 for fiscal 1998 due to the
increased number of online trading accounts. Revenues from principal
transactions increased by $671,592, or 291.6%, from $230,297 for fiscal 1997 to
$901,889 for fiscal 1998, largely as a result of the increased volume of
business conducted by our third-market institution sales desk. Interest and
other income increased from $130,095 for fiscal 1997 to $146,704 for fiscal
1998.
Interest expense increased from $212,359 for fiscal 1997 to $259,322
for fiscal 1998 as a result of increased borrowings.
As a result of the above, our net revenues increased by $4,539,773, or
105.1%, from $4,320,173 for fiscal 1997 to $8,859,946 for fiscal 1998.
Substantially all of our revenues were generated by clients in the United
States. No client or group of related clients accounted for 10% or more of our
revenues.
Total expenses increased by $4,102,221, or 76.3%, from $5,377,370 for
fiscal 1997 to $9,479,591 for fiscal
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1998. Clearing charges, floor brokerage and data fees represent payments to our
clearing brokers and to employees who facilitate our clients' transactions and
expenses related to market data services. As a result of the significant
increase in the volume of transactions by our clients, these expenses increased
by $1,580,798, or 85.7%, from $1,844,927 for fiscal 1997 to $3,425,725 for
fiscal 1998. Employment compensation and related costs increased by $950,388, or
73.2%, from $1,297,575 for fiscal 1997 to $2,247,963 for fiscal 1998 due to our
hiring of 25 additional personnel to service our increased client base.
Communications expense increased by $419,807, or 124.4%, from $337,584 for
fiscal 1997 to $757,391 for fiscal 1998 as a result of our substantially
increased base of online trading accounts. We expect that these expenses will
continue to increase as we seek to expand our client base.
Business development expenses increased by $539,227, or 122.2%, from
$441,424 for fiscal 1997 to $980,651 for fiscal 1998 as a result of our expanded
marketing efforts. We expect aggregate expenses to continue to increase as we
expand our marketing efforts. However, our new client acquisition costs
decreased on a per client basis.
Professional service expenses increased from $894,920 for fiscal 1997
to $971,494 for fiscal 1998. Occupancy and equipment costs increased by
$294,589, or 196.9%, from $149,580 for fiscal 1997 to $444,169 for fiscal 1998,
primarily due to the relocation of our offices to larger space and the purchase
of additional equipment in anticipation of our proposed expansion. Depreciation
and amortization expense increased by $164,227, or 82.5%, from $198,980 for
fiscal 1997 to $363,207 for fiscal 1998 for the same reasons. Other expenses
increased by $76,611, or 36.1%, from $212,380 for fiscal 1997 to $288,991 for
fiscal 1998 for the same reasons.
The income tax provision increased from $2,776 for fiscal 1997 to
$12,765 for fiscal 1998.
As a result of the foregoing, our operating results improved from a net
loss of $1,059,973 for fiscal 1997 to a net loss of $632,410 for fiscal 1998.
Liquidity and Capital Resources
Prior to our IPO, our capital requirements had exceeded our cash flow
from operations as we were building our business. Since the IPO, the proceeds
from the IPO and cash flow from operations have been able to satisfy our cash
needs as we continue to build our business. Based on our current assumptions
relating to our business plan, we anticipate our capital requirements will be
satisfied by internal sources for at least twelve months from our fiscal year
end. If our plans change or our assumptions prove to be inaccurate, we may need
to seek additional debt or equity financing sooner than currently anticipated or
curtail our operations. If we incur debt, we will become subject to the risks
that interest rates may fluctuate and cash flow may be insufficient to make
payments on the debt.
In the normal course of business, the Company, throughout fiscal 1999,
has entered into various operating leases which are used to obtain computer
equipment. In certain leases, we were required to deliver to the lender a
letter of credit or cash deposits. In connection with such leases, we have
granted the lender a security interest in all the equipment purchased using
funds obtained from the financing.
The Company incurred notes payable with a face value of $2,213,748 to
two vendors for the purchase of software licenses. The face value of the notes
include imputed interest totalling $221,697. The average effective interest
rate on the notes approximates 8%. The notes are payable in installments over
the next three years.
In October 1998, we obtained a $500,000 loan from New York Small
Business Venture Fund LLC, bearing interest at an annual rate of 12%, payable
monthly. In connection with this loan, we issued to the lender a $500,000
principal amount promissory note and warrants to purchase 191,250 shares of our
common stock at an exercise price equal to the initial public offering price of
our common stock. We granted the lender a security interest in substantially all
of our assets to secure our obligations under the loan, and six persons who are
our officers, directors and/or principal stockholders guaranteed our obligations
under this loan. We used these funds for the purchase of additional equipment,
marketing expenses, software development and working capital. We repaid the
loan, plus a 1% prepayment fee, from the proceeds of our IPO.
In January 1999, we obtained a $400,000 loan from New York Community
Investment Company L.L.C., bearing interest at an annual rate of 12%, payable
monthly. In connection with this loan, we issued to the lender a $400,000
principal amount promissory note and warrants to purchase 140,000 shares of our
common stock at an exercise price equal to the initial public offering price of
our common stock. We granted the lender a security interest in substantially all
of our assets to secure our obligations under the loan. We are using these funds
for
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marketing expenses and working capital.
In January 1999, we sold an aggregate of 221,500 shares of common stock
to 12 investors in a private placement at a price of $4.80 per share for which
we received aggregate net proceeds of approximately $1,050,000. In connection
with this private placement:
o Anthony Huston, our Executive Vice President, purchased 50,000
shares at a price of $240,000;
o Leon Ferguson, our Senior Vice President, purchased 52,000 shares
at a price of $249,600; and
o Mark Chambre, a director, purchased 15,000 shares at a price of
$72,000.
All of the purchasers of these shares agreed not to sell or otherwise
dispose of any of these shares through April 20, 2000.
On April 23, 1999, the Company consummated its initial public offering
of common stock. The Company sold 2,300,000 shares of common stock at a gross
offering price of $7 per share, receiving net proceeds of approximately
$13,250,000. The Company utilized approximately $776,800 for the repayment of
outstanding notes payable of $500,000 to New York Small Business Venture
Fund LLC and a $250,000 promissory note, including any accrued interest on these
same notes payable. We are using the proceeds of the IPO to expand our
operations and finance our future working capital requirements.
Cash used by operating activities during fiscal 1999 was $188,757. We
had a net loss of $801,602 and an increase from other assets of $1,460,857,
restricted cash of $513,753, securities owned of $109,863 and receivables from
clearing brokers of $94,453, which was offset by an increase in accounts payable
and accrued liabilities of $1,552,517, and other liabilities of $247,952,
depreciation and amortization of $626,187, amortization of option costs - loss
on early extinguishment of debt of $177,125 and non-cash amortization of option
costs of $157,115.
Cash used in investing activities was $6,013,595 during fiscal 1999.
Uses of cash in fiscal 1999 related to purchases of equipment, software and
leasehold improvements made in the Company's new facility at 40 Wall Street. In
addition to the cash used in investing activities during the year 1999, the
Company accrued accounts payable and notes payable relating to purchases of
property and equipment of $2,528,990 during this period.
Cash provided by financing activities was $14,530,866 during fiscal
1999. Cash provided by financing activities during fiscal 1999 consisted
primarily of proceeds from the sale of common stock in an initial public
offering of 2,300,000 shares at an offering price of $7.00.
During fiscal 1998, we received net proceeds of $990,000 from a private
placement of equity securities and $250,000 from the issuance of $250,000
principal amount notes and options to purchase an aggregate of 35,714 shares of
common stock for nominal consideration, of which $100,000 was furnished by Mel
Steinberg. We used these proceeds to develop software and to purchase a portion
of the equipment required to expand our online network. We paid the notes from
the proceeds of our IPO.
We had cash and cash equivalents of $970,308 as of September 30, 1998.
Our operating activities provided $582,325 of net cash. We had a net loss of
$632,410 and an increase in receivables from clearing brokers of $239,479, which
was more than offset by depreciation and amortization of $363,207, non-cash
amortization of option costs of $226,227, a non-cash compensation charge of
$115,000 and an increase in accounts payable and accrued liabilities of
$660,605. We used $1,440,345 of net cash in investing activities, consisting of
$2,244,313 of property and equipment purchases, which was partially offset by
deferred rent incentives of $803,968. Financing activities provided $1,125,635
of net cash, consisting of $990,870 of proceeds from sales of common stock and
$250,000 of proceeds from the issuance of notes payable, which were partially
offset by a $40,000 repayment of a loan to The Bank of New York and $75,235 of
payments made for deferred offering costs.
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Watley has outstanding an aggregate of $530,000 in the form of
subordinated loans, under agreements approved by the NASD. These loans are
included by Watley for purposes of computing its net capital under the SEC's net
capital rules. These borrowings by Watley consist of:
o a $55,000 principal amount non-interest bearing loan, and a
$125,000 principal amount loan, bearing interest at an annual rate
of 12%, from Steven Malin, our Chairman of the Board and Chief
Executive Officer; and
o a $200,000 principal amount loan, bearing interest at an annual
rate of 15% and a $150,000 principal amount loan bearing interest
at an annual rate of 13%, from Mel Steinberg, father of Eric
Steinberg, our Executive Vice President.
The loans mature in October 2000, except for the $125,000 loan which
matures in April 2000. For each of the years ended September 30, 1999 and 1998,
interest expense on these loans amounted to $64,000.
Watley is currently required to maintain minimum net capital such that
the ratio of aggregate indebtedness to net capital both as defined shall not
exceed 15 to 1 under the SEC's net capital rule. Such rule also prohibits
"equity capital" including the subordinated loans, from being withdrawn or cash
dividends from being paid if Watley's net capital ratio would exceed 10 to 1 or
if Watley would have less than its minimum required net capital. Accordingly,
Watley's ability to repay the subordinated loans may be restricted under the net
capital rule. At September 30, 1999, Watley had net capital of $4,178,815, which
was $4,042,741 in excess of its minimum required net capital, and Watley's
aggregate indebtedness to net capital ratio was .49 to 1.
Net Operating Loss Carryforwards
Our net operating loss carryforwards expire beginning in the year 2013.
The issuance of additional equity securities, together with our recent
financings and the IPO, could result in an ownership change and, thus, could
limit our use of our prior net operating losses. If we achieve profitable
operations, any significant limitation on the utilization of our net operating
losses would have the effect of increasing our tax liability and reducing net
income and available cash reserves. We are unable to determine the availability
of these net operating losses since this availability is dependent upon
profitable operations, which we have not achieved in prior periods.
Relevant Accounting Standards
We generally grant stock options to employees and consultants with an
exercise price not less than the fair market value at the date of grant. We
account for stock option grants to employees in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognize no compensation expense related to option grants
issued at or above the fair market value of the stock. In cases where we grant
options below the fair market value of the stock at the date of grant, the
difference between the strike price and the fair market value is treated as
compensation expense and amortized over the vesting period of the option, if
any. Stock options granted to consultants and others instead of cash
compensation are recorded based upon management's estimate of the fair value of
the options or the related services provided and expensed over the vesting
period, if any.
Pro forma information regarding net income (loss) is required under
Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based
Compensation," and has been determined as if we had accounted for all the 1998
and 1997 stock option grants on the fair value method.
We account for income taxes under the provisions of SFAS No.109,
"Accounting for Income Taxes." We recognize the current and deferred tax
consequences of all transactions that have been recognized in the financial
statements, using the provisions of enacted tax laws. Deferred tax assets are
recognized for temporary differences that will result in deductible amounts in
future years and for tax loss carryforwards, if, in the opinion of our
management, it is more likely than not that the deferred tax asset will be
realized. SFAS No.109 requires companies to set up a valuation allowance for the
component of net deferred tax assets which does not meet the more likely than
not criteria for realization. We have established this valuation
18
<PAGE>
allowance for our deferred tax assets.
In 1997, the Financial Accounting Standards Board issued SFAS No.128,
"Earnings per Share." The new rules are effective for both interim and annual
financial statements for the periods ending after December 15, 1997. SFAS No.
128 supersedes APB No.15 to conform earnings per share with international
standards as well as to simplify the complexity of the computation under APB
No.15. The previous primary earnings per share calculation is replaced with a
basic earnings per share calculation. The basic earnings per share differs from
the primary earnings per share calculation in that the basic earnings per share
does not include any potentially dilutive securities. Fully dilutive earnings
per share is replaced with diluted earnings per share and should be disclosed
regardless of dilutive impact to basic earnings per share. Accordingly, we have
adopted SFAS No.128 effective September 30, 1998.
In fiscal 1999, the Company adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. Under the new
standard, the Company is required to use the management approach to reporting
its segments. The management approach designates that the internal organization
that is used by management for making operating decisions and assessing
performance as the source of the Company's segments. Based on this approach, the
Company has determined that it operates in one reporting segment.
Year 2000 Issues
We have developed and implemented a plan to modify all of our hardware
and software and believe that our hardware and software are year 2000 compliant
so that the computer programs do not cease functioning because of an inability
to process on a date occurring from and after January 1, 2000. We do not believe
that any remediation costs will be material.
We are highly dependent upon third-party financial information vendors,
telecommunications suppliers and our clearing brokers. We have sent letters to a
number of our vendors requesting assurances of their compliance. Such third
parties have generally advised us that their review of their operating systems
indicate that their operating systems are year 2000 compliant or will be year
2000 compliant in a timely manner. We have developed a contingency plan if any
third parties with which we do business have any material year 2000 compliance
problems.
We have successfully completed our participation in testing with
clearing organizations and service providers, however, we would be materially
adversely affected if there are any failures or interruptions in service
resulting from the inability of our computing systems or any third-party's
systems to recognize the year 2000. Moreover, since our evaluation of these
issues is continuing, we may discover additional issues which could present a
material risk of disruption to our operations.
Item 7. Financial Statements.
The financial statements required by this Item are set forth at the
pages indicated in Item 13 following page 28 of this Report.
Item 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Steven Malin 42 Chairman of the Board, Chief Executive Officer and Director
Harry Simpson 33 President, Chief Operating Officer and Director
Robert Malin 34 President of A.B. Watley, Inc. and Director
Anthony G. Huston 36 Executive Vice President - Strategic Planning
Eric Steinberg 34 Executive Vice President - Administration
Leon Ferguson 37 Senior Vice President and Chief Information Officer
Brett Vernick 31 Senior Vice President - Management Information Services
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C>
Joseph M. Ramos, Jr. 41 Senior Vice President and Chief Financial Officer
William Brawer 42 Director
Elizabeth Chambers 36 Director
Mark Chambre 38 Director
Stanley Weinstein 73 Director
</TABLE>
Steven Malin co-founded our company in May 1996 and has been our
Chairman of the Board and Chief Executive Officer since inception. From August
1993 to December 1996, Mr. Malin served as a consultant to Watley. From 1987 to
1993, he was a Senior Foreign Exchange Options Broker for Tullett and Tokyo
Forex, Inc., a global inter-bank money brokering firm with its primary offices
located in London, New York and Tokyo. Mr. Malin attended the Fletcher School of
Law and Diplomacy from 1982 to 1984. He received a bachelor of arts degree from
Vassar College in 1980.
Harry Simpson has been our President and Chief Operating Officer since
March 1998 and was our Executive Vice President of Online Brokerage Services
from May 1996 until March 1998. From January 1993 to September 1995, he served
as Vice President of Tullett and Tokyo Forex, Inc. and Manager of its Foreign
Exchange Options Desk in New York. From January 1988 to December 1992, Mr.
Simpson worked as a Senior Foreign Exchange Options Broker for Exco
International, Inc., an international money broker in Hong Kong and Tokyo. Mr.
Simpson received a bachelor of science degree in finance from Indiana University
in 1987.
Robert Malin is a co-founder of our company. He has been associated
with Watley since August 1993, initially as General Securities Principal and
director of day-to-day operations and, most recently, serving as President. His
earlier experience includes managing equity-trading, client services and
brokerage operations. Mr. Malin and Steven Malin are brothers.
Anthony G. Huston. Mr. Huston has been our Executive Vice President
since May 1996. From September 1995 to May 1996, Mr. Huston served as a
consultant to Watley. From August 1988 to May 1995, he served as Vice President
and Manager in the Foreign Exchange Options Department in the New York, Tokyo,
and London offices of Tullett and Tokyo Forex, Inc. Mr. Huston received a
bachelor of arts degree in asian studies and international relations from the
University of Michigan in 1985. He attended New York University as a post
graduate student in economics.
Eric Steinberg. Mr. Steinberg has been our Executive Vice President of
Administration since March 1998. His responsibilities include management of our
offices and negotiating our purchase and leasing arrangements. From May 1996 to
February 1998, Mr. Steinberg served as an administrative consultant to our
company. From August 1993 to May 1996 he served as a consultant to Watley. From
1991 to 1993, he was a manager at Primary Financial Services, Inc., a financial
consulting and leasing company. From September 1986 to May 1991, Mr. Steinberg
was employed as an account manager by Manhattan Leasing, Inc., a New York based
leasing company.
Leon Ferguson. Mr. Ferguson joined us in October 1998 as Senior Vice
President and Chief Information Officer in connection with our acquisition of
Computer Strategies, Inc., a software consulting firm he formed in 1996 and
served as its President and Chief Executive Officer since inception. From May
1994 to January 1996, Mr. Ferguson served as Director of Information Technology
Strategies at Williams Telecommunications Group, a long-distance
telecommunications company that was acquired by WorldCom, Inc. in 1995. From May
1990 to May 1994, Mr. Ferguson served as Chairman of Digital Communications
Associates, Inc., a software development company he founded which specializes in
high speed transaction solutions for the long distance telecommunications
industry. Mr. Ferguson received a bachelor of computer science degree from the
University of Oklahoma in 1988.
Joseph M. Ramos, Jr. Mr. Ramos has been our Senior Vice President and
Chief Financial Officer since June 1999. From March 1998 to June 1999, he was
Chief Financial Officer of Nikko Securities Co., International, an international
broker-dealer. He was also Controller with Nikko Securities Co., International
from November 1997 to March 1998. From April 1997 to November 1997, he was Chief
Financial Officer of Brunswick Securities Inc., an international broker-dealer.
From September 1987 to February 1996, he served in various management positions
at Cantor Fitzgerald Securities, a broker-dealer. His most recent position was
Chief Financial Officer of their broker-dealer operations based in Los Angeles,
California. From October 1982 to September 1987, he was on the audit staff of
Deloitte & Touche, a big five accounting firm. Mr. Ramos is a Certified Public
Accountant,
20
<PAGE>
licensed in New York State. He received a bachelor of science degree in
accounting from St. John's University in 1982.
Brett Vernick. Mr. Vernick has served as our Senior Vice President for
Management Information Services since May 1996. From March 1995 to April 1996,
Mr. Vernick served as the Eastern U.S. Region Network Specialist for PC Quote,
Inc., an international data feed corporation. From August 1992 to February 1995,
he served as Director of Management Information Systems for Soil Mechanics
Environmental Services, Inc. Mr. Vernick received a bachelor of science degree
in political science and international relations from Stonybrook in 1993.
William Brawer has served as a director of our company since April
1999. Since February 1996, he has served as Chairman and Chief Executive Officer
of Brawer Brothers, a producer of nylon and polyester bi-products. Mr. Brawer
served in various other senior management capacities with Brawer Brothers. Mr.
Brawer received a bachelor of science degree from Colorado University in 1978.
Elizabeth Chambers has served as director of our company since April
1999. Since August 1998, she has been Vice President of Business Design and a
member of the executive committee at the Reader's Digest Association. Ms.
Chambers is also a member of the Board of Directors of the Reader's Digest
Foundation. From September 1989 to August 1998, Ms. Chambers was with McKinsey &
Company, where she was elected to partnership in June 1995. Ms. Chambers
graduated from Stanford University with degrees in political science and
economics, and holds an MBA from Harvard University.
Mark Chambre has served as a director of our company since April 1999.
Since June 1993, he has served as Senior Broker in the Yen Swaps Division of the
Tokyo Forex Co., Inc., in Tokyo, Japan. From April 1988 to Mary 1993, Mr.
Chambre served as Manager of the Tokyo Forex Co.'s Financial Futures Division.
Mr. Chambre joined its parent company, Tullett and Tokyo, Inc., in New York in
1983. Mr. Chambre received a bachelor of arts degree from Drew University in
1982.
Stanley Weinstein has served as a director of our company since April
1999. He has been an independent corporate financial consultant since 1991. From
1960 to 1991 he served as a partner with Deloitte & Touche, LLP, an
international accounting firm. Mr. Weinstein served for fifteen years as adjunct
Associate Professor of Accounting at Pace University and co-authored the widely
recognized SEC Compliance - Financial Reporting and Forms handbook. He received
a bachelor of business administration degree in accounting from City College of
New York in 1949. Since May 1995, he has served as a director of York Research
Corp., a company engaged in the production and marketing of energy related
products.
Directors are elected at each annual meeting of stockholders and hold
office until the next annual meeting of stockholders and the election and
qualifications of their successors. Executive officers are elected by and serve
at the discretion of the board of directors.
Compliance with Section 16(a) of the Exchange Act.
During the fiscal year ended September 30, 1999, based upon an
examination of the public filings, all of the Company's officers and directors
timely filed reports on Forms 3 and 4.
Item 10. Executive Compensation.
The following table sets forth for the fiscal year indicated the
compensation paid by our company to our Chief Executive Officer and other
executive officers with annual compensation exceeding $100,000:
21
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------- ------------
Awards
Name and Underlying
Principal Position Fiscal Year Salary Bonus Options/SARs(#)
- ------------------ ----------- ------ ----- ---------------
<S> <C> <C> <C> <C>
Steven Malin, 1999 $93,075 $18,615 0
Chairman and Chief
Executive Officer
Harry Simpson, 1999 99,736 19,947 200,000
President and Chief
Operating Officer
Leon Ferguson, 1999 86,769 17,353 150,000
Senior Vice President
and Chief Information
Officer
Brett Vernick, Senior 1999 90,426 18,085 0
Vice President,
Management Information
Services
</TABLE>
Employment Agreements
We have entered into a four-year employment agreement with Steven Malin
and three-year employment agreements with Harry Simpson, Robert Malin, Anthony
G. Huston, Eric Steinberg, Leon Ferguson, Brett Vernick and Joseph M. Ramos all
of which are automatically renewable for additional one-year terms. The
employment agreements provide for annual base compensation of $110,000, except
for Messrs. Ferguson and Vernick ($100,000) Mr. Ramos ($150,000). Each agreement
provides for a bonus equal to 20% of their salaries, payable semi-annually,
based upon certain revenue levels achieved by us, as may be approved by the
board of directors or a committee of the board.
Each of the employment agreements requires the officer to devote his
full time and efforts to our business and contains non-competition and
non-disclosure covenants of the officer for the term of his employment and for a
period of two years thereafter. Each employment agreement provides that we may
terminate the agreement for cause. In addition, each employment agreement
provides for termination by either party without cause upon at least 180 days
written notice prior to the end of the original term or any renewal term.
Directors' Compensation
All directors are reimbursed for their reasonable expenses incurred in
attending meetings of the board of directors and its committees. Directors who
are employees receive no additional compensation for service as members of the
board of directors or committees. All of our non-employee directors are
compensated annually for their services at $2,000 and non-qualified options to
acquire 1,500 shares of our common stock at the end of each year of service.
22
<PAGE>
Option Grants in Last Fiscal Year
The following table contains information concerning options granted to
executive officers named in the Summary Compensation Table during the fiscal
year ended September 30, 1999:
Individual Grants
<TABLE>
<CAPTION>
Number of Securities % of Total Options
Underlying Options Granted to Employees
Name Granted (#) in Fiscal Year Exercise Price ($/sh) Expiration Date
- ---- ----------- -------------- --------------------- ---------------
<S> <C> <C> <C> <C>
Steven Malin 0 n/a 0 n/a
Harry Simpson 200,000 18.7 7.00 4/20/2009
Leon Ferguson 150,000 14.0 7.00 4/20/2009
Brett Vernick 0 n/a 0 n/a
</TABLE>
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
No options were exercised by any executive officer named in the Summary
Compensation Table during the fiscal year ended September 30, 1999. The
following table contains information concerning the number and value, at
September 30, 1999, of unexercised options held by executive officers named in
the Summary Compensation Table:
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at FY-End (#) Options at FY-End ($)
Name (Exercisable/Unexercisable) (Exercisable/Unexercisable)(1)
- ---- --------------------------- ------------------------------
<S> <C> <C>
Steven Malin 0/0 0/0
Harry Simpson 66,667/133,333 379,169/758,331
Leon Ferguson 0/150,000 0/853,125
Brett Vernick 90,000/60,000 931,875/521,250
</TABLE>
(1) Fair market value of underlying securities (the closing price of the
Company's common stock on the National Associate of Securities Dealers Quotation
System) at fiscal year end (September 30, 1999) minus the exercise price.
STOCK OPTION PLANS
On January 27, 1997, the board of directors and stockholders adopted
our 1997 stock option plan and on March 16, 1998, our board of directors and
stockholders adopted our 1998 stock option plan. We have reserved 400,000 shares
of common stock for issuance supon exercise of options granted from time to time
under the 1997 stock option plan and 800,000 shares of common stock for issuance
upon exercise of options granted from time to time under the 1998 stock option
plan. The 1997 and 1998 stock option plans are intended to assist us in securing
and retaining key employees, directors and consultants by allowing them to
participate in our ownership and growth through the grant of incentive and
non-qualified options.
Under each of the stock option plans we may grant incentive stock
options only to key employees and employee directors, or we may grant
non-qualified options to our employees, officers, directors and consultants. The
1997 stock option plan is administered by a committee, appointed by our
board of directors, consisting of from one to three directors. The 1998 stock
option plan is administered directly by our board of directors.
Subject to the provisions of each of the stock option plans, either the
board or the committee will determine who shall receive options, the number of
shares of common stock that may be purchased under the options, the time
23
<PAGE>
and manner of exercise of options and exercise prices. The term of options
granted under each of the stock option plans may not exceed ten years or five
years for an incentive stock option granted to an optionee owning more than 10%
of our voting stock. The exercise price for incentive stock options shall be
equal to or greater than 100% of the fair market value of the shares of the
common stock at the time granted; provided that incentive stock options granted
to a 10% holder of our voting stock shall be exercisable at a price equal to or
greater than 110% of the fair market value of the common stock on the date of
the grant. The exercise price for non-qualified options will be set by the board
or the committee, in its discretion, but in no event shall the exercise price be
less than the fair market value of the shares of common stock on the date of
grant. The exercise price may be payable in cash or, with the approval of the
board or the committee, by delivery of shares or by a combination of cash and
shares. Shares of common stock received upon exercise of options granted under
each of the plans will be subject to restrictions on sale or transfer.
As of November 1, 1999, we have granted options to purchase 1,467,450
shares of common stock under our stock options plans at an exercise price
ranging from $.02 to $19.94 per share. Of these options, options to purchase
881,500 shares have been granted to our officers and directors. Of these
options, 125,000 with an exercise price of $.02 have been exercised. All of the
options granted to such officers and directors terminate on the ten year
anniversary of their grant date.
On November 1, 1999, the board of directors, subject to stockholder
approval to be sought at our annual meeting of stockholders to be held in March
2000, adopted our 1999 stock option plan. We have reserved 800,000 shares of
common stock for issuance upon exercise of options granted from time to time
under the 1999 stock option plan. The 1999 stock option plan is intended to
assist us in securing and retaining key employees, directors and consultants by
allowing them to participate in our ownership and growth through the grant of
incentive and non-qualified options.
Under the 1999 stock option plan we may grant incentive stock options
only to key employees and employee directors, or we may grant non-qualified
options to our employees, officers, directors and consultants. The 1999 stock
option plan shall be administered directly by our board of directors.
Subject to the provisions of the 1999 stock option plan, the board will
determine who shall receive options, the number of shares of common stock that
may be purchased under the options, the time and manner of exercise of options
and exercise prices. The term of options granted under the 1999 stock option
plan may not exceed ten years or five years for an incentive stock option
granted to an optionee owning more than 10% of our voting stock. The exercise
price for incentive stock options shall be equal to or greater than 100% of the
fair market value of the shares of the common stock at the time granted;
provided that incentive stock options granted to a 10% holder of our voting
stock shall be exercisable at a price equal to or greater than 110% of the fair
market value of the common stock on the date of the grant. The exercise price
for non-qualified options will be set by the board, in its discretion. The
exercise price may be payable in cash or, with the approval of the board, by
delivery of shares or by a combination of cash and shares. Shares of common
stock received upon exercise of options granted under the 1999 stock option plan
will be subject to restrictions on sale or transfer.
As of September 30, 1999 and subject to stockholder approval as
described above, we have granted options to purchase 268,500 shares of common
stock under the 1999 stock option plan at an exercise price ranging from $9.81
to $13.00 per share. Of these options, options to purchase 230,500 shares have
been granted to newly-hired officers. All of the options granted terminate on
the ten year anniversary of their grant date.
Through April 20, 2000, we will not grant additional options or
warrants to our existing officers, directors, employees or stockholders
beneficially owning 5% or more of the outstanding voting securities or their
affiliates.
Item 11. Security Ownership Of Certain Beneficial Owners and Management.
The following table sets forth information known to A.B. Watley Group
Inc., as of December 1, 1999, relating to the beneficial ownership of shares of
common stock by: each person who is known by us to be the beneficial owner of
more than five percent of the outstanding shares of common stock; each director;
and all executive officers and directors as a group.
24
<PAGE>
Unless otherwise indicated, the address of each beneficial owner in the
table set forth below is care of A.B. Watley Group Inc., 40 Wall Street, New
York, New York 10005.
We believe that all persons named in the table have sole voting and
investment power with respect to all shares of common stock beneficially owned
by them.
A person is deemed to be the beneficial owner of securities that can be
acquired by him within 60 days from December 1, 1999 upon the exercise of
options, warrants or convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that options, warrants or convertible
securities that are held by him, but not those held by any other person, and
which are exercisable within 60 days of December 1, 1999 have been exercised and
converted.
<TABLE>
<CAPTION>
Number of Shares Percentage of Shares
Name and Address of Beneficial Owner Beneficially Owned Beneficially Owned
- ------------------------------------ ------------------ ------------------
<S> <C> <C>
Steven Malin 1,878,294 23.7%
Linda Malin 1,000,300 12.6
Robert Malin 850,000 10.7
Anthony G. Huston 325,000 4.1
Eric Steinberg 300,000 3.8
Harry Simpson 216,667 2.7
Mark Chambre 52,500 .7
William Brawer 0 0
Elizabeth Chambers 0 0
Stanley Weinstein 0 0
All directors and executive officers as a
group (12 persons) 3,358,428 42.3%
</TABLE>
The number of shares beneficially owned by Steven, Linda and Robert
Malin include shares held in irrevocable family and charitable trusts for which
they are trustees. In addition, the number of shares held by Steven Malin
includes shares held by a family partnership for which Steven Malin is the
general partner.
The number of shares beneficially owned by Anthony Huston does not
include 175,000 shares held by an irrevocable family trust of which Anthony
Huston is a beneficiary.
The number of shares beneficially owned by Eric Steinberg does not
include 125,000 shares held by an irrevocable family trust of which Eric
Steinberg is a beneficiary.
The number of shares beneficially owned by Harry Simpson includes
66,667 shares of common stock issuable upon exercise of currently exercisable
options, but does not include 133,333 shares of common stock issuable upon
exercise of options which are not currently exercisable or 350,000 shares held
in trusts of which Harry Simpson is a beneficiary.
The number of shares beneficially owned by all of our officers and
directors as a group includes 208,334 shares of common stock issuable upon
exercise of currently exercisable options, but does not include 411,666 shares
of common stock issuable upon exercise of options which are not currently
exercisable.
Item 12. Certain Relationships and Related Transactions.
In October 1994, Steven Malin, Chairman of the Board and Chief
Executive Officer and a principal stockholder of A.B. Watley Group, loaned
Watley $55,000 on an interest free basis. The maturity date for this loan is
October 31, 2000. Additionally, in April 1995, Mr. Malin loaned Watley $125,000
at an annual interest rate of 12%. The maturity date for this loan is April 30,
2000. Each of these loans are subordinate to the prior payment by Watley in full
of all other present and future creditors.
In October 1995, Mel Steinberg, the father of Eric Steinberg, an
executive officer and principal stockholder of A.B. Watley Group, loaned Watley
$200,000 at an annual interest rate of 15%. Additionally, effective October
25
<PAGE>
30, 1996, Mr. Steinberg loaned Watley $150,000 at an annual interest rate of
13%. The maturity date for each of the loans is October 31, 2000. Each of these
loans are subordinate to the prior payment by Watley in full of all other
present and future creditors.
On September 4, 1996, we loaned $100,000 to Robert Malin, President of
Watley and a director and principal stockholder of A.B. Watley Group. The loan
bears interest at an annual rate of 6% and is due upon demand.
In January 1997, we acquired all of the issued and outstanding shares
of Watley which were held by Steven Malin and Robert Malin. As consideration for
the acquisition, we issued 425,000 shares of common stock to Robert Malin and
6,535 shares of common stock to Steven Malin. The aggregate value of the shares
issued by us was $80,000.
In April 1997, we completed a private placement of 1,050,000 shares of
our common stock for which we received net proceeds of $2,045,000. In connection
with the private placement, Jonathan Priddle, an officer of A.B. Watley Group,
purchased 25,000 shares at a price of $50,000 and Mark Chambre, a director of
A.B. Watley Group, purchased 37,500 shares at a price of $75,000. In addition,
relatives of Anthony Huston and Eric Steinberg, each an executive officer and
principal stockholder of A.B. Watley Group, purchased an aggregate of 62,500
shares at an aggregate price of $125,000. All of these purchases were on the
same terms and at the same price as the purchases made by the other investors in
this private placement.
In May 1997, we sold computer hardware and related assets to Centennial
Ventures, Inc., a broker-dealer of which Linda Malin, a principal stockholder of
A.B. Watley Group and the sister of Steven and Robert Malin, is an executive
officer. As consideration for this sale, Centennial Ventures, Inc. delivered a
promissory note in the principal mount of $39,860.75. The note is payable on
demand, bears interest at an annual rate of 8% and is secured by all of the
assets we sold to Centennial Ventures, Inc.
In February 1998, Mel Steinberg loaned to A.B. Watley Group $100,000 at
an interest rate of 8%. The loan is due in February 2001. As additional
consideration for the loan, we granted Mr. Steinberg an option to purchase
14,286 shares of common stock for nominal consideration. Mr. Steinberg exercised
the option in April, 1999. We repaid the loan, including accrued interest, from
the proceeds of the IPO.
On October 2, 1998, we entered into a loan agreement with New York
Small Business Venture Fund LLC under which we borrowed $500,000 at an annual
interest rate of 12%, repayable over 35 months, with payments of interest only
in the first two years. We granted the lender a security interest in
substantially all of our assets to secure our obligations under the loan, and
six persons who are officers, directors and/or principal stockholders of A.B.
Watley Group guaranteed our obligations under this loan. We repaid this loan out
of the proceeds of the IPO, which discharged the liability of the guarantors.
Stanley Weinstein, a director of A.B. Watley Group, received a $25,000
consulting fee from us in connection with the loan.
Effective October 2, 1998, we acquired all of the shares of capital
stock of Computer Strategies, Inc. for 38,260 shares of our common stock valued
at $183,648. Leon Ferguson was the founder and sole stockholder of Computer
Strategies, Inc. and became our Senior Vice President and Chief Information
Officer upon the closing of the acquisition.
In January 1999, we completed a private placement of 221,500 shares of
common stock to 12 investors for which we received net proceeds of approximately
$1,050,000. In connection with this private placement:
o Anthony Huston purchased 50,000 shares at a price of $240,000;
o A trust naming Leon Ferguson and his wife as beneficiaries for
which Mr. Ferguson is sole trustee purchased 52,000 shares at a
price of $249,600; and
o Mark Chambre purchased 15,000 shares at a price of $72,000.
All of the purchasers of these shares agreed not to sell or otherwise
dispose of these shares for a period of twelve months from the date of the IPO.
All of these purchases were made on the same terms and at the same price per
share as the purchases made by the other investors in this private placement.
26
<PAGE>
We believe that prior transactions with our officers, directors and
principal stockholders were on terms that were no less favorable that we could
have obtained from unaffiliated third parties. All future transactions,
including loans and advances, between us and our officers, directors and
stockholders beneficially owning 5% or more of our outstanding voting
securities, or their affiliates, will be for bona fide business purposes and on
terms not less favorable to us than we could have obtained in arm's length
transactions from unaffiliated third parties.
Item 13. Exhibits and Reports on Form 8-K.
(a) Documents filed as part of this report:
1. Financial Statements:
---------------------
Consolidated Financial Statements of A.B. Watley Group Inc. and
subsidiaries
----------------------------------------------------------------------
Report of Independent Auditors
Consolidated Statement of Financial Condition--Year ended
September 30, 1999
Consolidated Statements of Operations--Years ended September 30, 1999
and 1998
Consolidated Statements of Changes in Stockholders' Equity--Years
ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows--Years ended September 30, 1999
and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
-----------------------------
Financial Statement schedules have been omitted because the required
information is inapplicable or because the information is presented in
the financial statements or related notes.
3. Exhibits and Index:
-------------------
Exhibit
No. Description
--- -----------
1.1 Form of Underwriting Agreement*
3.1 Restated Certificate of Incorporation of the Company and form of
amendment thereto.*
3.2 By-Laws of the Company, as amended.*
4.1 Specimen Common Stock Certificate.*
4.2 Form of Underwriter's Warrant Agreement, including Form of Warrant
Certificate.*
10.1 1997 Stock Option Plan.*
10.2 Second Amended and Restated 1998 Stock Option Plan.*
10.3 Employment Agreement dated as of May 1, 1997 between the Company and
Steven Malin and Amendment to Employment Agreement dated as of
October 1, 1998 between the Company and Steven Malin.*
10.4 Employment Agreement dated as of June 1, 1997 between the Company and
Harry Simpson and Amendment to Employment Agreement dated October 1,
1998 between the Company and Harry Simpson.*
10.5 Employment Agreement dated as of January 1, 1999 between the Company
and Robert Malin.*
10.6 Employment Agreement dated as of June 1, 1997 between the Company and
Anthony G. Huston and Amendment to Employment Agreement dated as of
October 1, 1998 between the Company and Anthony G. Huston.*
10.7 Employment Agreement dated as of March 1, 1998 between the Company and
Eric Steinberg.*
10.8 Office lease dated as of June 20, 1997 between 40 Wall Development
Associates, LLC, as Landlord and the Company as Tenant for premises
located at 40 Wall Street, New York, New York.*
10.9 [Intentionally omitted.]
10.10 [Intentionally omitted.]
10.11 Co-Branding Agreement dated October 11, 1996 between PC Quote, Inc. and
A.B. Watley, Inc., as amended.*
27
<PAGE>
10.12 Computer Software License Agreement dated December 8, 1996 between
Townsend Analytics, Ltd. and A.B. Watley, Inc., as amended.*
10.13 Fully Disclosed Clearing Agreement dated October 3, 1996 and Amendment
dated June 8, 1998 between Penson Financial Services, Inc. and A.B.
Watley, Inc.*
10.14 Fully Disclosed Correspondent Agreement dated November 18, 1996 between
Weiss, Peck & Greer, L.L.C. and A.B. Watley, Inc.*
10.15 License Agreement dated as of October 1, 1998 between Ethos Corporation
and A.B. Watley, Inc.*
10.16 Service Marketing Representative Agreement dated as of January 29, 1998
between S&P ComStock, Inc. and A.B. Watley, Inc.*
10.17 Master Lease Agreement dated December 17, 1998 between General Electric
Capital Corporation and the Company.*
10.18 Security Agreement dated December 17, 1998 between General Electric
Capital Corporation and the Company.*
10.19 Letter of Credit Agreement dated December 17, 1998 between General
Electric Capital Corporation and the Company.*
10.20 Loan Agreement dated January 28, 1999 between New York Community
Investment Company L.L.C., the Company and A.B. Watley, Inc.*
10.21 Promissory Note of the Company and A.B. Watley, Inc. dated January 28,
1999 issued to the New York Community Investment Company L.L.C.*
10.22 Security Agreement dated January 28, 1999 between New York Community
Investment Company L.L.C. and A.B. Watley, Inc.*
10.23 Security Agreement dated January 28, 1999 between New York Community
Investment Company L.L.C. and the Company.*
10.24 Objectivity Master License and Support Agreement dated September 30,
1999 between Objectivity, Inc. and A.B. Watley Group Inc.
10.25 Reseller Network License Order Form dated May 26, 1999 between
Database Consultants Inc. and A.B. Watley Group Inc.
23.2 Consent of Ernst & Young LLP, independent auditors.
- --------------
* Filed as an exhibit to the Company's Registration Statement on Form
SB-2 (File No. 333-71783) and hereby incorporated by reference herein.
(b) Reports on Form 8-K:
--------------------
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
28
<PAGE>
A.B. Watley Group Inc.
Consolidated Financial Statements
Years Ended September 30, 1999 and 1998
Contents
<TABLE>
<S> <C>
Report of Independent Auditors F-2
Consolidated Statement of Financial Condition as of September 30, 1999 F-3
Consolidated Statements of Operations for the Years Ended September 30, 1999 and 1998 F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
September 30, 1999 and September 30, 1998 F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders of
A.B. Watley Group Inc.
We have audited the accompanying consolidated statement of financial
condition of A.B. Watley Group Inc. (the "Company") as of September 30, 1999,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years ended September 30, 1999 and 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of A.B.
Watley Group Inc. as of September 30, 1999, and the consolidated results of its
operations and its cash flows for the years ended September 30, 1999 and 1998 in
conformity with generally accepted accounting principles.
Ernst & Young LLP
New York, New York
November 22, 1999
F-2
<PAGE>
A.B. Watley Group Inc.
Consolidated Statement of Financial Condition
September 30, 1999
------------------
ASSETS
Cash and cash equivalents $ 9,298,822
Restricted cash 513,753
Securities owned at market value 214,381
Receivables from clearing brokers 626,288
Property and equipment at cost, net of accumulated depreciation
of $1,183,774 10,852,956
Loans receivable from related party 121,891
Deferred offering costs 21,667
Other assets 1,595,196
------------
Total assets $ 23,244,954
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Subordinated borrowings $ 350,000
Subordinated borrowings from officer 180,000
Securities, sold not yet purchased 56,192
Notes payable, net of unamortized discount of $221,697 2,213,748
Bank loan 40,000
Deferred rent incentives 752,512
Accounts payable and accrued liabilities 3,561,563
Other liabilities 247,952
------------
Total liabilities 7,401,967
------------
Stockholders' equity:
Common stock, $.001 par value, 20,000,000
authorized, 7,931,745 issued and outstanding 7,932
Additional paid-in capital 18,661,749
Option costs, net (121,331)
Accumulated deficit (2,705,363)
------------
Total stockholders' equity 15,842,987
------------
Total liabilities and stockholders' equity $ 23,244,954
============
See notes to consolidated financial statements.
F-3
<PAGE>
A.B. Watley Group Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended
-----------
September 30, September 30,
1999 1998
---- ----
<S> <C> <C>
Revenues:
Commissions $ 16,198,858 $ 7,403,059
Data service revenues 1,640,123 661,236
Principal transactions 2,456,874 901,889
Interest and other income 685,578 146,704
Interest income - related party 6,180 6,380
------------ ------------
Total revenues 20,987,613 9,119,268
Interest expense 333,457 244,322
Interest expense - related party 15,000 15,000
------------ ------------
Net revenues 20,639,156 8,859,946
------------ ------------
Expenses:
Clearing charges, floor brokerage, and data fees 7,967,765 3,425,725
Employee compensation and related costs 5,306,590 2,247,963
Communications 1,236,449 757,391
Business development 2,016,372 980,651
Professional services 1,532,994 971,494
Occupancy and equipment costs 1,907,080 444,169
Depreciation and amortization 621,188 363,207
Other expenses 642,701 288,991
------------ ------------
Total expenses 21,231,139 9,479,591
------------ ------------
Loss before income tax
and extraordinary loss on early extinguishment of debt (591,983) (619,645)
Income tax provision 32,494 12,765
------------ ------------
Loss before extraordinary loss on early
extinguishment of debt (624,477) (632,410)
Extraordinary loss on early extinguishment of debt (177,125) --
------------ ------------
Net loss $ (801,602) $ (632,410)
============ ============
Basic and diluted earnings before extraordinary item per
common share ($0.09) ($0.12)
============ ============
Basic and diluted earnings per common share ($0.11) ($0.12)
============ ============
Weighted average shares outstanding - basic
7,136,434 5,171,182
============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
A.B. Watley Group Inc.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Issued Additional Subscriptions Receivable
---------------------- Paid-in Option ------------------------
Shares Par Value Capital Costs, net Shares Amount
------ --------- ------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1997 5,050,000 5,050 $ 2,441,902 -- (3,568,462) $(120,869)
Issuance of common stock, net 87,500 88 874,912 -- 3,318,451 115,870
Issuance of non-employee stock
options -- -- 76,832 -- -- --
Other contributions -- -- 115,000 -- -- --
Option costs, net -- -- 249,687 $(100,292) -- --
Net loss -- -- -- -- -- --
--------- ------- ----------- --------- ---------- ---------
Balance at September 30, 1998 5,137,500 $ 5,138 $ 3,758,333 $(100,292) (250,011) $ (4,999)
Issuance of common stock, net 2,794,245 2,794 14,548,137 -- 250,111 4,999
Issuance of non-employee stock
options -- -- 24,029 -- -- --
Option costs, net -- -- 331,250 (21,039) -- --
Net loss -- -- -- -- -- --
--------- ------- ----------- --------- ---------- ---------
Balance at September 30, 1999 7,931,745 $ 7,932 $18,661,749 $(121,331) -- $ --
========= ======= =========== ========= ========== =========
<CAPTION>
Accumulated
Deficit Total
------- -----
<S> <C> <C>
Balance at October 1, 1997 $(1,271,351) $ 1,054,732
Issuance of common stock, net -- 990,870
Issuance of non-employee stock
options -- 76,832
Other contributions -- 115,000
Option costs, net -- 149,395
Net loss (632,410) (632,410)
----------- -----------
Balance at September 30, 1998 $(1,903,761) $ 1,754,419
Issuance of common stock, net 14,555,930
Issuance of non-employee stock
options -- 24,029
Option costs, net -- 310,211
Net loss (801,602) (801,602)
----------- -----------
Balance at September 30, 1999 $(2,705,363) $15,842,987
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
A.B. Watley Group Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended
----------------------------
September 30, September 30,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (801,602) $ (632,410)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Other contributions 115,000
Depreciation and amortization 626,187 363,207
Amortization of option costs 157,115 226,227
Loss on early extinguishment of debt 177,125 --
Changes in assets and liabilities:
(Increase) decrease in operating assets:
Restricted cash (513,753) 113,569
Securities owned (109,863) (80,312)
Receivables from clearing brokers (94,453) (239,479)
Loans receivable from related party (6,180) 7,986
Other assets (1,460,857) 28,795
Increase in operating liabilities:
Securities sold, not yet purchased 37,055 19,137
Accounts payable and accrued liabilities 1,552,517 660,605
Other liabilities 247,952 --
------------ ------------
Net cash provided by (used in) operating activities (188,757) 582,325
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property and equipment, net (6,013,595) (2,244,313)
Deferred rent incentives -- 803,968
------------ ------------
Net cash used in investing activities (6,013,595) (1,440,345)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock, net 14,364,798 990,870
Proceeds from exercised stock options 2,500 --
Proceeds from notes payable 150,000 250,000
Deferred offering costs 53,568 (75,235)
Repayment of bank loan (40,000) (40,000)
------------ ------------
Net cash provided by financing activities 14,530,866 1,125,635
------------ ------------
Net increase in cash and cash equivalents 8,328,514 267,615
Cash and cash equivalents at beginning of year 970,308 702,693
------------ ------------
Cash and cash equivalents at end of year $ 9,298,822 $ 970,308
============ ============
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
AND DISCLOSURE OF CASH FLOW INFORMATION
Accounts payable for purchases of property and equipment $ 715,242 $ 759,429
Notes payable for purchases of property and equipment 1,813,748
Other contributions -- 115,000
Cash paid for:
Interest $ 184,371 $ 90,802
Taxes 5,858 2,776
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
A.B. Watley Group Inc.
Notes to Consolidated Financial Statements
Years ended September 30, 1999 and 1998
1. Organization and Basis or Presentation
A.B. Watley Group Inc. ("ABWG" or the "Company"), which was formerly known as
Internet Financial Services Inc., conducts business primarily through its
principal subsidiary, A.B. Watley, Inc. ("A.B. Watley"). A.B. Watley is a
registered broker-dealer under the Securities Exchange Act of 1934 and is a
member of the National Association of Securities Dealers, Inc.
A.B. Watley is an introducing broker-dealer which conducts business in
electronic trading, information and brokerage services, as well as institutional
block trading. A.B. Watley clears all transactions through two clearing brokers
on a fully disclosed basis. Accordingly, A.B. Watley is exempt from the
Securities and Exchange Commission's ("SEC") Rule 15c3-3.
ABWG is a Delaware corporation organized on May 15, 1996. During its fiscal year
ended September 30, 1997, all of the shares of capital stock of A.B. Watley were
acquired by ABWG. Since ABWG and A.B. Watley were under common control, the
acquisition has been accounted for under Accounting Interpretations of the
Accounting Principles Board Opinion No. 16, "Transfers and Exchanges Between
Companies Under Common Control," which requires the assets and liabilities so
transferred to be accounted for at historical cost in a manner similar to that
used in pooling of interests accounting. ABWG issued 431,538 shares of its
common stock in consideration for the 99 shares of A.B. Watley; additionally,
the operating results of ABWG reflect the operating results of A.B. Watley for
the years presented.
The consolidated financial statements include the accounts of ABWG and its
wholly-owned subsidiary, A.B. Watley. All significant intercompany balances and
transactions have been eliminated. Certain prior year amounts reflect
reclassifications to conform to current year's presentations.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents: Cash and cash equivalents include highly liquid
instruments with original maturities of less than three months held by one
global financial institution.
Restricted Cash:
Restricted cash consists of cash on deposit at a financial institution securing
letters of credit and lines of credit.
Securities Transactions, Revenues, and Related Expenses:
Securities transactions and related revenues and expenses, including commissions
revenues and expenses, are recorded on a trade date basis. Data service revenues
represent fees charged to customers for rea1-time access to various financial
data. These fees are recorded as earned.
Securities Owned and Sold, Not Yet Purchased:
Securities owned and securities sold, not yet purchased are stated at market or
fair values; with resulting unrealized gains and losses reflected in the
consolidated statements of operations. Market value is generally based on listed
market prices. If listed market prices are unattainable, fair value is
determined based on other relevant factors including broker or dealer price
quotes.
F-7
<PAGE>
A.B. Watley Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Years ended September 30, 1999 and 1998
2. Summary of Significant Accounting Policies - (Continued)
Property and Equipment:
Computer equipment, furniture and fixtures, and leasehold improvements are
carried at cost and depreciated on the straight-line basis over their estimated
useful lives, generally three to five years.
Construction-in-progress, upon occupancy, will be amortized on a straight-line
basis over the shorter of the useful life of the leasehold improvement or the
term of the lease, generally ten years upon occupancy. Deferred rent incentives,
which represent construction costs reimbursed by the lessor of the Company's
office space, will be amortized on a straight-line basis over the term of the
lease, which is ten years.
Computer software is amortized on the straight-line basis over a period of three
years. The cost of internally developed computer software is capitalized when
management commits to funding a project it believes will be completed and used
to perform the functions intended. The capitalized software is not amortized
until the projects are complete. Pilot projects and projects where expected
future economic benefits are less than probable are not eligible for
capitalization.
Use of Estimates:
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities in
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Stock Options:
The Company accounts for stock option grants to employees in accordance with
Accounting Principles Board Opinion ("APB") No.25, "Accounting for Stock Issued
to Employees," and, accordingly, recognizes no compensation expense related to
such grants. In cases where the Company grants options below the fair market
value of the stock at the date of grant, the difference between the strike price
and the fair market value is treated as compensation expense and amortized over
the vesting period of the option. Stock options granted to consultants and
others in lieu of cash compensation are recorded based upon management's
estimate of fair value of the options or the related services provided and
expensed in the same period(s) and in the same manner as if the Company had paid
cash for the services instead of paying with or using the stock options.
Fair Value of Financial Instruments:
Substantially all of the Company's financial instruments are carried at fair
value or amounts approximating fair value.
Business Development:
The Company expenses all promotional costs as incurred and advertising costs
upon first exhibition of the advertisement. Substantially all business
development cost relates to advertising.
Income Taxes:
Income taxes have been provided using the liability method under Statement of
Financial Accounting Standards ("SFAS") No.109, "Accounting for Income Taxes."
Earnings Per Share:
Per share data is determined based on the weighted average number of common
shares outstanding each year.
Segment Reporting:
In fiscal 1999, the Company adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. Under the new
standard, the Company is required to use the management approach to reporting
its segments. The management approach designates that the internal organization
that is used by management for making operating decisions and assessing
performance as the source of the Company's segments. Based on this approach, the
Company has determined that it operates in one reporting segment.
3. Initial Public Offering
On April 23, 1999, 2,300,000 shares of the Company's common stock (including
300,000 shares to cover over-allotments) were sold in an initial public offering
("IPO"). The net proceeds from the offering of approximately $13,250,000 are
being used primarily to reduce outstanding indebtedness, expand sales and
marketing, expand and upgrade the Company's computing, physical, and personnel
infrastructure and for working capital and general corporate matters.
F-8
<PAGE>
A.B. Watley Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Years ended September 30, 1999 and 1998
4. Net Capital Requirement
A.B. Watley is subject to the SEC's Uniform Net Capital Rule 15c3-1 (the "Net
Capital Rule") which requires A.B. Watley to maintain minimum net capital such
that the ratio of aggregate indebtedness to net capital, both as defined, shall
not exceed 15 to 1. The Net Capital Rule also requires that equity capital may
not be withdrawn or cash dividends paid if A.B. Watley's resulting net capital
ratio would exceed 10 to 1. At September 30, 1999, A.B. Watley had net capital,
as defined, of $4,178,815 which was $4,042,841 in excess of its required net
capital of $135,974. The aggregate indebtedness to net capital ratio was .49 to
1.
5. Financial Instruments with Off-Balance Sheet Risk or Concentration of Credit
Risk
Pursuant to clearing agreements, the clearing and depository operations for A.B.
Watley's and customers' securities transactisons are provided by two clearing
broker-dealers. A.B. Watley has agreed to indemnify its clearing brokers for
losses that the clearing brokers may sustain from the customer accounts
introduced by A.B. Watley. A.B. Watley, through its clearing brokers, seeks to
control the risks associated with these activities by requiring customers to
maintain margin collateral in compliance with various regulatory and internal
guidelines. The clearing brokers monitor required margin levels daily and,
pursuant to such guidelines, request customers to deposit additional collateral
or reduce securities positions when necessary. All customer transactions pending
as of September 30, 1999 settled without material adverse effect to the Company.
Also, in the normal course of business, customers may sell securities short.
Subsequent market fluctuations may require the clearing firms to obtain
additional collateral from A.B. Watley's customers. It is the policy of the
clearing firms to value the short positions and to obtain additional deposits
where deemed appropriate.
The Company may at times maintain inventories in equity securities on both a
long and short basis. While long positions represent the Company's ownership of
securities, short positions represent obligations of the Company. Accordingly,
both long and short positions may result in gains or losses to the Company as
market values of securities fluctuate. To manage the risk of losses, the Company
marks long and short positions to market daily and continuously monitors the
market fluctuations.
6. Property and Equipment
September 30
1999
----
Computer equipment $ 2,885,616
Software 6,541,916
Construction-in-progress 608,937
Furniture, fixtures and leasehold improvements 2,000,261
-------------
12,036,730
Less accumulated depreciation and amortization 1,183,774
-------------
$10,852,956
=============
At September 30, 1999, software includes $5,954,860 of software under
development. (See Note 2). The Company anticipates completion of the software
under development in the first half of fiscal 2000. Construction-in-progress
represents amounts related to leasehold improvements being made on the Company's
office space. The Company expects to occupy such space in early fiscal 2000.
(See Note 2).
7. Subordinated Borrowings
Borrowings of $530,000 at September 30, 1999 are subordinated to the claims of
general creditors, and mature in the amount of $125,000 on April 30, 2000 and
$200,000, $150,000 and $55,000 on October 31, 2000. The subordinated borrowings
bear interest at annual rates of 12%, 15%, 13% and 0%, respectively.
The loans are covered by agreements approved by the National Association of
Securities Dealers, Inc. and are included by A.B. Watley for purposes of
computing net capital under the Net Capital Rule. To the extent that such
borrowings are required for A.B. Watley's continued compliance with minimum net
capital requirements, they may not be repaid. Of the total subordinated
borrowings, $180,000 is from an officer and stockholder of the Company. For the
year ended September 30, 1999, interest expense on the subordinated loans
amounted to $64,500.
F-9
<PAGE>
A.B. Watley Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Years ended September 30, 1999 and 1998
8. Notes Payable
Effective February 13, 1998 and Apri1 16, 1998, the Company issued promissory
notes in the amount of $200,000 and $50,000, respectively, to three individuals,
two of whom are minority stockholders of the Company. The notes bear interest at
8% per annum. The principal plus accrued interest on the notes is payable on the
earlier of (a) the consummation of the IPO, or (b) if such IPO does not occur on
or before the first anniversary of the issue date of the notes, the principal
plus accrued interest shall be payable in twelve equal monthly installments,
unless the holders agree to extend such maturity date. For the year ended
September 30, 1998, interest expense on the notes amounted to $11,833.
Upon execution of these promissory notes, the holders were granted options on
the common stock of the Company for a total price of $250. Pursuant to the
Option Agreements, the 35,714 options became exerciseable upon consummation of
the IPO. The fair value of the options was accounted for as a debt servicing
fee, and was amortized over a one year period. Amortization expense related to
the debt servicing fee for the year ended September 30, 1999 and 1998 amounted
to $100,292 and $149,395.
On May 5, 1999, the Company paid the promissory notes and accrued interest from
the proceeds of the IPO. The principal and interest of the promissory notes were
$250,000 and $21,983, respectively.
Effective October 2, 1998, the Company borrowed $500,000 from New York Small
Business Venture Fund, LLC ("NYSB") under the condition that the proceeds of the
loan be used as working capital to further the corporate purposes of the Company
and not to repay any debt or redeem any equity interests. The loan accrues
interest at 12% per annum which is payable first in 24 monthly installments of
$5,000 beginning December 1, 1998. Commencing December 1, 2000, the principal
amount of the loan is payable in 35 monthly installments of $8,333 plus interest
on the unpaid balance, except for the last installment which shall be in the
amount of $208,345 plus interest on the unpaid balance.
As collateral for the loan, NYSB received a security interest in the Company's
assets, and certain officers and directors of the Company had personally
guaranteed all amounts due. Under the terms and conditions of the loan
agreement, NYSB received warrants expiring October 2, 2003 to acquire 191,250
shares of the Company's common stock at an exercise price equal to the IPO
price. The fair value of the warrants (approximately $191,250) was accounted for
as a debt servicing fee and was amortized over the life of the loan. The loan
was subsequently repaid with the proceeds of the IPO (See Footnote 17).
Effective January 28, 1999, the Company borrowed $400,000 from New York
Community Investment Company, L.L.C. ("NYCIC"), an affiliate of NYSB, under the
conditions that the proceeds of the loan be used as working capital to further
the corporate purposes of the Company and not to repay any debt or redeem any
equity interests. The loan accrues interest at 12% per annum which is payable
first in 24 monthly installments of $4,000 beginning March 1, 1999. Commencing
March 1, 2001, the principal amount of the loan is payable in 35 monthly
installments of $6,667 plus interest on the unpaid balance, except for the last
installment which shall be in the amount of $166,665 plus interest on the unpaid
balance.
As collateral for the loan, NYCIC received a security interest in the Company's
assets. Under the terms and conditions of the loan agreement, NYCIC received
warrants expiring January 28, 2004 to acquire 140,000 shares of the Company's
common stock at an exercise price equal to the IPO price. The fair value of the
warrants (approximately $140,000) is being accounted for as a debt servicing fee
and amortized over the life of the loan. The unamortized amount of the debt
servicing fee is included as "Option costs, net" in Stockholders' Equity.
Amortization expense relating to the debt servicing fee for the year ended
September 30, 1999 amounted to $18,669.
The Company incurred notes payable of $2,035,445 to two vendors for the purchase
of software licenses. The face value of the notes include imputed interest
totaling $221,697. The average effective interest rate on the notes approximates
8%. The notes are payable in installments over the next three years, $731,487
payable in fiscal 2000, $832,712 payable in fiscal 2001, and $471,246 payable in
fiscal 2002.
9. Bank Loan
The bank loans at September 30, 1999 consist of an unsecured term loan, with the
full principal amount due September 29, 2000, and an interest rate of 8.5% per
annum.
10. Related Party Transactions
Included in loans receivable from related party at September 30, 1999 on the
consolidated statement of financial condition are notes of $103,000, plus
accrued interest of $18,891, due from a stockholder and officer of the Company.
The notes generally bear
F-10
<PAGE>
A.B. Watley Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Years ended September 30, 1999 and 1998
interest at an annual rate of 6% and are payable on demand.
Other contributions of $115,000 on the consolidated statement of changes in
stockholders' equity represent compensation forgiven by two significant
stockholders and officers of the Company. For consolidated financial statement
purposes, the unpaid compensation is considered an expense and a contribution of
capital.
11. Commitments and Contingencies
The Company has entered into certain leases for office space under
noncancellable operating lease agreements that expire on June 23, 2009 and
contain escalation provisions. The Company has also entered into various
operating leases which are used to obtain computer equipment and software. As of
September 30, 1999, the aggregate minimum future rental payments required were
as follows:
Year Ended September 30
- -----------------------
2000 $2,292,958
2001 2,753,383
2002 2,193,911
2003 1,483,016
2004 1,435,473
Thereafter 5,513,231
-----------
$15,671,972
===========
Rent expense for the years ended September 30, 1999 and 1998 was $976,476 and
$170,101, respectively.
The Company entered into a software maintenance and education program with a
vendor for a three year period commencing on July 1, 1999 for $1,329,960 payable
in twelve quarterly payments.
In the ordinary course of business, the Company is party to several legal
proceedings, the outcome of which, either singularly or in the aggregate, is not
expected to have a material impact on the Company's financial position.
12. Acquisition
Effective October 2, 1998, and as subsequently modified, the Board of Directors
approved the issuance of 38,260 shares of the Company's common stock for all the
shares of capital stock of Computer Strategies, Inc. ("CSI"). CSI provided
software support, research and development to the Company with the Company
serving as CSl's primary customer. The acquisition was accounted for as a
purchase. The Company recorded approximately $60,000 in goodwill from the
acquisition which is being amortized over 3 years, and approximately $59,000 in
capitalized software attributable to costs incurred in the application
development stage of the Company's software development. At the date of
acquisition, CSI owed $85,580 to the sole shareholder of CSI, who became an
officer of the Company. This amount is included in notes payable to related
party and was paid to Mr. Ferguson in January and February 1999.
13. Stock Options
Under the Company's 1999, 1998 and 1997 Stock Option Plans (the "Plans"),
employees, non-employee directors, officers, and consultants are generally
granted options (both incentive stock options and nonqualified stock options) to
purchase shares of common stock at prices not less than the estimated fair
market value of the common stock on the date the option is granted. The options
are exercisable at either the date of grant, in ratable installments or
otherwise, generally over a period of one to three years from the date of grant.
The options generally expire within ten years after the date of grant. The
number of shares delivered in the aggregate under the 1999, 1998 and 1997 Plans
cannot exceed 800,000, 800,000 and 400,000 shares, respectively, (2,000,000
shares in total). No option shall be granted under the 1999 Plan after November
1, 2009, under the 1998 Plan after March 16, 2008 or under the 1997 Plan after
January 26, 2007.
A summary of the Company's stock option activity (exclusive of the options
discussed in Note 8) and related information for the years ended September 30,
1999 and 1998 is as follows:
F-11
<PAGE>
A.B. Watley Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Years ended September 30, 1999 and 1998
Number of Weighted Average
Shares Exercise Price
---------- ----------------
Outstanding at October 1, 1997 375,000 1.90
Granted, year ended September 30, 1998 45,100 8.89
Outstanding at September 30, 1998 420,100 2.34
Granted, year ended September 30, 1999 1,068,850 7.89
Exercised, year ended September 30, 1999 125,000 0.02
Forfeited, year ended September 30, 1999 1,500 9.40
Outstanding at September 30, 1999 1,362,450 5.94
Exercisable at September 30, 1998 312,500 1.88
Exercisable at September 30, 1999 342,955 4.49
Included in the table above are non-employee option grants of 44,750 and 20,000
shares, respectively, for the years ended September 30, 1999 and 1998.
The weighted average fair value of options granted during the years ended
September 30, 1999 and 1998 was $3.05 and $1.13, respectively. The fair value of
each option grant was estimated at the date of grant using the Black-Scholes
option valuation model. The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. Because the Company's stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value estimate of its
stock options. In calculating the fair values of the stock options, the
following weighted average assumptions were used:
<TABLE>
<CAPTION>
1999 Grants 1999 Grants 1998 Grants
----------- ----------- -----------
Subsequent Prior
to IPO To IPO
------------- ------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Weighted average expected life:
Employees 4.8 years 4.8 years 5.4 years
Non-employees 0.2 years 0.2 years 0.5 years
Weighted average risk-free interest rate 5.1% 5.1% 5.4%
Expected volatility 77% 0% 0%
</TABLE>
Pro forma information regarding net income is required under Statement of
Financial Accounting Standards ("SFAS") No.123, "Accounting for Stock-Based
Compensation," and has been determined as if the Company had accounted for all
the 1999 and 1998 stock option grants on the fair value method. For purposes of
the pro forma information, the fair values of the 1999 and 1998 option grants to
employees are amortized over the vesting period. The pro forma information for
the years ended September 30, 1999 and 1998 is as follows:
F-12
<PAGE>
A.B. Watley Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Years ended September 30, 1999 and 1998
Year ended September 30,
--------------------------
1999 1998
----------- -----------
Net loss as reported ............... $ (801,602) $ (632,410)
Net loss pro forma ................. $(1,228,531) $ (674,499)
Net loss per share as reported ..... $ (.11) $ (.12)
Net loss per share pro forma ....... $ (.17) $ (.13)
Additional information regarding options outstanding as of September 30, 1999
(exclusive of the options discussed in Note 8) is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- ------------------------------------
Range of Exercisable Number Weighted Average Weighted Average Number Weighted Average
Prices Outstanding as Remaining Exercise Price Exercisable as Exercise Price
of 9/30/99 Contractual Life of 9/30/99
(years)
- ------------------------ ---------------- ------------------- ------------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
$2.00 180,500 8.52 $2.00 160,500 $2.00
$5.00 85,700 9.78 $5.00 29,500 $5.00
$7.00 809,600 9.27 $7.00 152,955 $7.00
$9.81-$19.94 286,650 9.93 $10.42 -- --
--------- -------
1,362,450 342,955
========= =======
</TABLE>
On November 1, 1999, the board of directors, subject to stockholder
approval to be sought at the Company's annual meeting of stockholders to be held
in March 2000, adopted the Company's 1999 stock option plan.
As of September 30, 1999 and subject to formal stockholder approval as
described above, the Company granted options to purchase 268,500 shares of
common stock under the 1999 stock option plan at an exercise price ranging from
$9.81 to $13.00 per share.
For financial reporting purposes, the Company is required to recognize
compensation expense on the options issued under the 1999 stock option plan
equal to the instrinsic value of the options, defined as the positive difference
between the fair value of the Company's common stock at September 30, 1999 and
the strike prices of options, amortized over the vesting period of the options.
For the year ended September 30, 1999, the compensation expense incurred related
to the 1999 stock option plan was immaterial.
14. Income Taxes
The Company files consolidated federal, state and local income tax returns with
A.B. Watley. For all periods presented, the Company provides for income taxes as
required under SFAS No. 109. The Company records income taxes using a liability
approach for financial accounting and reporting which results in the recognition
and measurement of deferred tax assets based supon the likelihood of realization
of tax benefits in future years.
The provision for income taxes for the years ending September 30, 1999 and 1998
is comprised of New York State and New York City taxes in the amount of $32,494
and $12,765, respectively. No benefit has been provided for the Company's net
operating losses.
Year ended September 30
-----------------------
1999 1998
Tax benefit at federal statutory rate (34.0%) (34.0%)
State taxes, net of federal tax effect 2.7 2.9
Valuation allowance 32.0 33.9
Other 3.4 (.03)
------ ---------
Effective tax rate 4.1% 2.5%
====== ========
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Components of the Company's
deferred tax assets and liabilities as of September 30, 1999 and 1998 are as
follows:
F-13
<PAGE>
A.B. Watley Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Years ended September 30, 1999 and 1998
Year ended September 30
-----------------------
1999 1998
Net operating loss $ 1,276,868 $ 638,238
Mark-to-market loss on inventory -- 10,932
Depreciation (291,171) (82,221)
Other 1,201 6,927
----------- -----------
Total deferred tax assets 986,898 573,876
Valuation reserve (986,898) (573,876)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
At September 30, 1999, the Company had a net operating loss carryforward for
federal tax purposes of $2,509,418 that will expire no sooner than September 30,
2013.
15. Capital Stock
On January 14, 1999, the Board of Directors agreed to amend the Company's
certificate of incorporation to increase the authorized number of shares of
common stock to 20,000,000, and to authorize and delineate the terms under which
preferred stock may be issued. In addition, the Board agreed to issue, subject
to the effectiveness of the IPO, 70,771 additional shares of common stock for
nominal additional consideration to certain stockholders who purchased private
placement shares during the year ended September 30, 1998.
During January 1999, the Board of Directors approved the issuance of 221,500
shares of the Company's common stock in a private placement offering. The common
stock was issued at a price of $4.80 per share and was restricted with regard to
sale or disposition for a period of one year. This private placement offering
generated total gross proceeds of $1,063,200 and after related legal and filing
expenses of $13,200, the net proceeds were $1,050,000. Two employees of the
Company purchased an aggregate of 102,000 shares as part of this offering.
Upon effectiveness of the IPO, the Company issued 3,000 shares of common stock
with a three year restriction provision for nominal consideration to certain
employees of the Company. In addition, the Company issued 70,771 shares of
common stock for nominal additional consideration to certain stockholders who
purchased private placement shares during the year ended September 30, 1998.
16. Earning Per Share
The weighted average number of shares outstanding for the years ended September
30, 1999 and 1998 reflect the 70, 771 shares as though the shares were
outstanding as of the beginning of each year. Since the Company recognized a net
loss in both years, diluted earnings per common share is the same as earnings
per common share for both years.
17. Extraordinary Item
On April 29, 1999, the Company prepaid the $500,000 loan from NYSB bearing an
interest rate of 12% from the proceeds of the IPO. Accordingly, the Company
recorded an extraordinary loss of $177,125 ($0.02 per share) related to the
early retirement of debt. The extraordinary loss was comprised of a $5,000
prepayment penalty and unamortized option costs of $172,125. There was no tax
benefit recognized for the extraordinary item because of the Company's net
operating losses.
F-14
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
A.B. WATLEY GROUP INC.
By: /s/ Steven Malin
----------------------
Steven Malin
Chairman of the Board
Date: December 29, 1999
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Steven Malin Chairman of the Board, Chief Executive Officer and December 29, 1999
- ---------------- Director (Principal Executive Officer and Principal
Steven Malin Financial Officer)
/s/ Joseph M. Ramos, Jr. Senior Vice President and Chief Financial Officer December 29 1999
- ------------------------ (Principal Accounting Officer)
Joseph M. Ramos, Jr.
/s/ Harry Simpson President, Chief Operating Officer and Director December 29, 1999
- -----------------
Harry Simpson
/s/ Robert Malin Director December 29, 1999
- ----------------
Robert Malin
- -------------- Director December __, 1999
William Brawer
- ------------------ Director December __, 1999
Elizabeth Chambers
/s/ Mark Chambre Director December 29, 1999
- ----------------
Mark Chambre
/s/ Stanley Weinstein Director December 29, 1999
- ---------------------
Stanley Weinstein
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
No. Description
--- -----------
1.1 Form of Underwriting Agreement*
3.1 Restated Certificate of Incorporation of the Company and form of
amendment thereto.*
3.2 By-Laws of the Company, as amended.*
4.1 Specimen Common Stock Certificate.*
4.2 Form of Underwriter's Warrant Agreement, including Form of Warrant
Certificate.*
10.1 1997 Stock Option Plan.*
10.2 Second Amended and Restated 1998 Stock Option Plan.*
10.3 Employment Agreement dated as of May 1, 1997 between the Company and
Steven Malin and Amendment to Employment Agreement dated as of
October 1, 1998 between the Company and Steven Malin.*
10.4 Employment Agreement dated as of June 1, 1997 between the Company and
Harry Simpson and Amendment to Employment Agreement dated October 1,
1998 between the Company and Harry Simpson.*
10.5 Employment Agreement dated as of January 1, 1999 between the Company
and Robert Malin.*
10.6 Employment Agreement dated as of June 1, 1997 between the Company and
Anthony G. Huston and Amendment to Employment Agreement dated as of
October 1, 1998 between the Company and Anthony G. Huston.*
10.7 Employment Agreement dated as of March 1, 1998 between the Company and
Eric Steinberg.*
10.8 Office lease dated as of June 20, 1997 between 40 Wall Development
Associates, LLC, as Landlord and the Company as Tenant for premises
located at 40 Wall Street, New York, New York.*
10.9 [Intentionally omitted.]
10.10 [Intentionally omitted.]
10.11 Co-Branding Agreement dated October 11, 1996 between PC Quote, Inc. and
A.B. Watley, Inc., as amended.*
10.12 Computer Software License Agreement dated December 8, 1996 between
Townsend Analytics, Ltd. and A.B. Watley, Inc., as amended.*
10.13 Fully Disclosed Clearing Agreement dated October 3, 1996 and Amendment
dated June 8, 1998 between Penson Financial Services, Inc. and A.B.
Watley, Inc.*
10.14 Fully Disclosed Correspondent Agreement dated November 18, 1996 between
Weiss, Peck & Greer, L.L.C. and A.B. Watley, Inc.*
10.15 License Agreement dated as of October 1, 1998 between Ethos Corporation
and A.B. Watley, Inc.*
10.16 Service Marketing Representative Agreement dated as of January 29, 1998
between S&P ComStock, Inc. and A.B. Watley, Inc.*
10.17 Master Lease Agreement dated December 17, 1998 between General Electric
Capital Corporation and the Company.*
10.18 Security Agreement dated December 17, 1998 between General Electric
Capital Corporation and the Company.*
10.19 Letter of Credit Agreement dated December 17, 1998 between General
Electric Capital Corporation and the Company.*
10.20 Loan Agreement dated January 28, 1999 between New York Community
Investment Company L.L.C., the Company and A.B. Watley, Inc.*
10.21 Promissory Note of the Company and A.B. Watley, Inc. dated January 28,
1999 issued to the New York Community Investment Company L.L.C.*
10.22 Security Agreement dated January 28, 1999 between New York Community
Investment Company L.L.C. and A.B. Watley, Inc.*
10.23 Security Agreement dated January 28, 1999 between New York Community
Investment Company L.L.C. and the Company.*
10.24 Objectivity Master License and Support Agreement dated September 30,
1999 between Objectivity, Inc. and A.B. Watley Group Inc.
10.25 Reseller Network License Order Form dated May 26, 1999 between
Database Consultants Inc. and A.B. Watley Group Inc.
23.2 Consent of Ernst & Young LLP, independent auditors.
- --------------
* Filed as an exhibit to the Company's Registration Statement on Form
SB-2 (File No. 333-71783) and hereby incorporated by reference herein.
<PAGE>
OBJECTIVITY, INC.
OBJECTIVITY MASTER LICENSE AND SUPPORT AGREEMENT
This OBJECTIVITY MASTER LICENSE AND SUPPORT AGREEMENT ("Agreement") is
made and entered into as of the date set forth on the signature page below (the
"Effective Date"), by and between Objectivity, Inc., a California corporation
having its principal place of business at 301B East Evelyn Avenue, Mountain
View, California, 94041-1530 ("Objectivity"), and the customer whose name and
address is set forth on the signature page below (the "Customer"). This
Agreement incorporates by reference certain license fee and other information
set forth in a purchase order from Customer. These terms and conditions apply to
all Customer orders for Products (as hereinafter defined) and/or services
accepted by Objectivity, while this Agreement is in force, whether or not the
order references this Agreement, unless the order has specific language that
this Agreement shall not apply. These terms and conditions supersede and replace
all other terms, as well as preprinted terms of purchase order, quotations and
acknowledgment forms of either party.
1. PRODUCTS LICENSE
1.1 Rights Granted.
(a) Objectivity hereby grants to Customer a fee-bearing, nonexclusive
and nontransferable license to use the Products solely for Customer's internal
operations by an individual user at a specific location, the location being
designated in the purchase order. Notwithstanding the foregoing, certain
Products may be licensed for use on a single CPU by multiple users, as may be
provided in the purchase order. Customer may make archival and backup copies of
the Products, which copies shall be subject to the provisions of this Agreement,
and all proprietary rights notices shall be reproduced in such copies.
"Products" means (i) the Objectivity computer products specified in the
Customer's purchase order in object code form only and (ii) user documentation.
License fees for the Products shall be as specified in any Product Exhibit A to
this Agreement or order form that lists the Products licensed hereunder and the
fees related thereto. Copying of the user documentation is not permitted except
with the prior written consent of Objectivity.
(b) If Customer is licensing the Products for development purposes, as
designated in the purchase order, Objectivity hereby grants to Customer a
fee-bearing, non-exclusive license to create applications to be used in
conjunction with the Products. This license includes writing, editing,
compiling, linking, and debugging code which creates, retrieves, updates or
deletes objects using the Products. Customer has no right to transfer such
applications or otherwise allow access to any other individual user unless such
individual user has ordered a license and is bound, in writing, by this
Agreement.
(c) If Customer is licensing the Products as an end user, Objectivity
hereby grants to Customer a fee-bearing, non-exclusive license to use the
Products to create, retrieve, update or delete objects in conjunction with
applications created by others. Customer is not granted any license to create or
modify applications to be used in conjunction with the Products. Any individual
user employing applications which access objects from the Products, even if the
Products are not running on such user's computer, must order a license and be
bound, in writing, by this Agreement.
(d) If Customer is licensing Objectivity's C++ database product, the
Standards [ToolKit] will be included. Customer is permitted to distribute
executable software which is created using Standards [ToolKit] without paying
royalty. Licensee is only permitted to distribute the Standards [ToolKit]
software in the form of a shared library or dynamic link library solely to be
used with Licensee's compiled executables for the purpose of dynamic loading.
Except as permitted above, Licensee is prohibited from redistributing any
portion of the Standards [ToolKit] software or online documentation in any form
of printed or electronic communication including but not limited to magnetic
media, internet communications, and bulletin boards.
(e) Customer has the right to sublicense the Products under terms no
less restrictive than this Agreement to (i) Affiliates of Customer and (ii)
joint ventures in which Customer owns an equity or comparable ownership
interest. "Affiliate" of Customer means any company directly or indirectly
controlling, controlled by or under common control with Customer.
1
<PAGE>
(f) Customer agrees to place the following proprietary rights notice on
any application using the Products:
Objectivity/DB(R)
Copyright(C)1989-1999
Objectivity, Inc.
All rights reserved
The notice shall be applied to all copies of the Products, in some
form, either human or machine readable.
(g) Customer agrees not to engage in, cause or permit the reverse
engineering, disassembly, decompilation or any similar manipulation of the
Products. Customer acquires only the right to use the Products as specified
herein, and all rights, title and interest in the Products shall at all times
remain the property of Objectivity or Objectivity's licensors.
1.2 License Restrictions. The rights granted in Section 1.1 are expressly
limited to, and restricted by, the following:
Source Code. Except as provided in Exhibit C, Customer shall not be
entitled to access to the Source Code, and Customer shall have no license or
other right to use or compile the Source Code. "Source Code" shall mean the
underlying set of computer instructions: (a) which comprise the Products; (b)
which are readable by human beings when displayed on a monitor or printed on
paper, regardless of the media on which the Products are stored, and (c) which
(other than the programming notes) must be translated, by a process generally
known as compiling, into Object Code before the Products can be executed by a
computer.
2. TERM AND TERMINATION
2.1 Term. The term of the Agreement shall be perpetual from the
Effective Date, unless terminated earlier under the provisions
of this Section.
2.2 Termination. This Agreement will terminate automatically as
follows: (a) at the end of thirty (30) days after written notice by a party
specifying a material breach, if the breaching party fails to cure the breach
within such thirty (30) day period; (b) upon ten (10) days written notice if the
material breach specified constitutes a violation of Sections titled, 1 --
"Products License," and 5.4 -- "Nondisclosure"; (c) immediately upon written
notice if either party becomes insolvent or bankrupt, or is unable to meet its
obligations when they become due; (d) immediately upon a receiver or other
liquidating officer being appointed for all or substantially all of the assets
or business of either party, or upon either party's assignment for the benefit
of creditors, or upon all or substantially all the rights or interest of either
party under this Agreement becoming an asset under any bankruptcy, insolvency or
reorganization proceeding.
2.3 Results of Termination.
(a) All licenses and other rights granted by Objectivity shall
be immediately revoked and become null and void upon the termination of this
Agreement due to a material breach by Customer. Within thirty (30) days of
termination of this Agreement, Customer shall return to Objectivity all Products
and materials related to the Products, except that Customer may retain the
minimum number of copies reasonably necessary to fulfill its contractual
obligations. Alternatively, upon Objectivity's written request, Customer shall
destroy the remaining Products and certify in writing to Objectivity that the
Products have been destroyed. Customer shall continue to make any payments due
to Objectivity in connection with Customer's fulfillment of any contractual
obligations. Within thirty (30) days of termination of this Agreement, Customer
shall deliver to Objectivity a certificate signed by an officer of Customer that
Customer has complied with the requirements of this Section.
(b) All outstanding obligations or commitments to pay amounts
to Objectivity, if any, shall become immediately due and payable and shall be
paid in full without set-off.
(c) Customer shall have no right to receive any compensation,
reimbursement or other amounts from Objectivity, and shall have no ownership or
other right whatsoever in or to (1) the Products, (2) any copyrighted materials
2
<PAGE>
relating to the Products, or (3) any Objectivity Trademarks, service marks,
trade secrets or other proprietary rights relating to the Products.
3. MAINTENANCE AND SUPPORT SERVICES
3.1 Services. During the term of the Agreement, and in consideration of
the maintenance fees paid by Customer, Objectivity shall maintain the Products
according to the specifications in Attachment A.
4. WARRANTIES, REMEDIES, LIMITATION OF LIABILITY
4.1 Infringement Indemnity.
(a) Objectivity will defend Customer against a claim that Products
furnished and used within the scope of this Agreement infringe a U.S. copyright
or a U.S. patent ("Claim"), and Objectivity will indemnify Customer for any
damages or any settlement amount paid based upon a Claim, provided Customer
notifies Objectivity in writing of the details of a Claim within thirty (30)
days after its occurrence, and Customer provides Objectivity (at Objectivity's
expense for reasonable out-of-pocket-expenses) with the assistance, information
and authority necessary for Objectivity to conduct the defense and all related
settlement negotiations. Customer may participate, at its own expense, in the
defense of the Claim.
(b) Notwithstanding any other provision of this Agreement, Objectivity
shall have no liability for any Claim based on: (i) use of a superseded or
altered release of Products if such Claim would have been avoided by use of
current or unaltered releases of such Products and such current or unaltered
releases were made available to Customer or (ii) the combination, operation or
use of any of the Products furnished under this Agreement with programs or data
not furnished by Objectivity if such Claim would have been avoided by use of the
Products without such programs or data.
(c) In the event the Products are held or are believed by Objectivity
to infringe, Objectivity shall have the option, at its expense, to (i) modify
the Products to be non-infringing, (ii) obtain for Customer a license to
continue using the Products, or (iii) substitute the Products with other
software reasonably suitable to Customer. Objectivity reserves the right to
terminate the license for the infringing Products and refund the license fees
paid for such Products if it cannot reasonably take any of the actions set forth
above. This Section 4.1 states Customer's exclusive remedy and Objectivity's
entire liability for any infringement.
4.2 Warranties, Exclusive Remedies and Disclaimers.
(a) Warranties. Objectivity warrants that each Product will be free
from any Software Problem so long as Customer is receiving Maintenance and
Support Services, unless such Products are modified by Customer. Objectivity
does not warrant that the operation of the Products will be uninterrupted or
error-free, that all Software Problems will be corrected, that the Products will
satisfy Customer's requirements, or that the Products will operate in the
combinations which Customer may select for use. For any breach of the above
warranties, Customer's exclusive remedy, and Objectivity's entire liability,
shall be for Objectivity to take the actions specified in Maintenance and
Support Services.
Objectivity warrants that, for a period of one (1) year from January 1,
2000 (the "Year 2000 Warranty Period"), each Product will accurately process,
prior to, during and after the year 2000, all: (i) date-related data and (ii)
dates before, on or after January 1, 2000, including but not limited to
accurately inputting, storing, manipulating, comparing, calculating, updating,
recording, displaying, outputting, and transferring such dates and data;
provided that such warranty will not apply to output, results, errors, or
abnormal terminations caused in whole or in part by (i) any functionality of the
Products not created by Objectivity or use of the Products in combination with
any other product not created by Objectivity, (ii) errors not attributable to
date-specific data, (iii) any modifications of the Products made by a party
other than Objectivity, or (iv) any data provided to the Products that does not
specify the century or is incorrect or ambiguous. As Customer's sole and
exclusive remedy for any breach of this warranty, Objectivity will use
commercially reasonable efforts to correct any reproducible failure of the
Products to be year 2000 compliant that is reported by Customer to Objectivity
in writing during the Year 2000 Warranty Period.
(b) Limitations on Warranties. THE WARRANTIES ABOVE ARE EXCLUSIVE AND
IN LIEU OF ALL OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING BUT NOT
LIMITED TO THE IMPLIED
3
<PAGE>
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND
NON-INFRINGEMENT. The warranties above shall apply only if alleged defects
actually exist and were not caused by Customer's misuse, unauthorized
modifications, neglect, improper installation or testing, attempts to repair, or
the like, or by accident, fire, power surge or failure, or other hazard. Repair
or replacement of a part, code or other item will be warranted so long as
Customer is receiving Maintenance and Support Services or thirty (30) days,
whichever is longer.
4.3 Limitation of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE
FOR ANY INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES UNDER THIS
AGREEMENT, INCLUDING LOSS OF PROFITS, REVENUE, DATA, OR USE, INCURRED BY EITHER
PARTY OR ANY THIRD PARTY, WHETHER IN AN ACTION IN CONTRACT OR TORT OR BASED ON A
WARRANTY. EXCEPT FOR THE INFRINGEMENT INDEMNITY SET FORTH IN SECTION 4.1,
OBJECTIVITY'S LIABILITY FOR DAMAGES UNDER THIS AGREEMENT SHALL IN NO EVENT
EXCEED THE AMOUNT OF LICENSE FEES PAID BY CUSTOMER UNDER THIS AGREEMENT. SOME
STATES AND JURISDICTIONS OUTSIDE OF THE UNITED STATES DO NOT ALLOW THE
LIMITATION OR EXCLUSION OF IMPLIED WARRANTIES, OR LIABILITY FOR INCIDENTAL OR
CONSEQUENTIAL DAMAGES, SO THE ABOVE LIMITATION OR EXCLUSION MAY NOT APPLY.
CUSTOMER ACKNOWLEDGES THAT THE ALLOCATION OF RISKS AND BENEFITS UNDER THIS
AGREEMENT ARE BASED ON, AND THE LICENSE FEES UNDER THIS AGREEMENT WOULD BE
GREATER IN THE ABSENCE OF, THE LIMITATIONS DESCRIBED ABOVE.
5. GENERAL TERMS
5.1 Payments and Taxes. Unless otherwise specified on a an Exhibit to
this Agreement, Customer shall pay all fees for licenses, maintenance and
support and other items as specified on an executed Exhibit to this Agreement
within thirty (30) days of Objectivity's invoice date. All such fees are
exclusive of, and Customer shall be responsible for, all taxes, freight, duties,
assessments and the like except for taxes based on Objectivity's net income. All
payments shall be in U.S. Dollars. Any sum not paid when due shall thereafter
bear interest until paid at a rate of interest equal to one and one-half percent
(1.5%) per month, but in no event to exceed the maximum rate of interest allowed
by applicable law.
5.2 Records and Reports. Customer agrees to keep all usual and proper
records and books of account and all usual and proper entries relating to each
transaction involving any Product. These records shall contain all information
necessary to calculate obligations to Objectivity and shall include, without
limitation, the Product name, the number of units or users licensed, and the
date of license or internal distribution.
5.3 Audits. Objectivity shall have the right to audit all Customer
accounting records reasonably related to this Agreement. An audit may be
conducted on fifteen (15) business days written notice, during Customer's normal
business hours, no more than once each calendar year, and at Objectivity's
expense. However, Customer shall pay all costs of the audit if the audit reveals
either: (a) any material breach of the terms and conditions of this Agreement,
or (b) the difference between the amount due to Objectivity and the amount
reported by Customer is greater than five percent (5%) of the amount due
Objectivity. If the amount due is more than reported, then Customer shall pay
immediately; if the amount due is less than the amount reported then Objectivity
shall refund the difference immediately.
5.4 Nondisclosure. The parties agree, both during the term of this
Agreement and for a period of three (3) years after termination of this
Agreement and of all licenses granted under this Agreement: (a) to hold in
confidence information which is confidential to the other ("Confidential
Information," as more fully described below); (b) not to disclose or make each
other's Confidential Information available, in any form, to any third party; and
(c) not to use each other's Confidential Information for any purpose other than
as specified in this Agreement. In addition, each party agrees to take all
reasonable steps to ensure that Confidential Information is not disclosed or
distributed by its employees or agents (who shall be entitled to have access to
same only on a need-to-know basis) in violation of any provision of this
Agreement. A party's Confidential Information shall be limited to the Products,
information related thereto (including results of benchmark test of any
Products), and all information clearly marked as confidential and shall not
include information which: (i) is or becomes a part of the public domain through
no act or omission of the other party; (ii) was in the other party's lawful
possession prior to such access to or the disclosure of same and had not been
obtained by such other party either directly or indirectly from the party hereto
granting such access or making such disclosure, all of which is properly
documented by such other party; (iii) is lawfully disclosed to the other party
by a third party having a legal right to so disclose without restriction on such
disclosure; or (iv) with respect to information that is the same as or
4
<PAGE>
substantially identical to the Confidential Information, is entirely
independently developed by the other party, which independent development is
properly documented by such other party; or (v) information that is required to
be disclosed by law in any judicial or administrative proceeding or by a
governmental or regulatory agency.
5.5 Notice. All notices, including notices of address change, required
or permitted to be given hereunder shall be in English and in writing and shall
be deemed to have been received (i) when received if hand delivered, (ii) seven
(7) days after being properly mailed, postage prepaid, by first class, certified
or registered mail, (iii) two (2) business days after being sent by a major
express document courier, or (iv) when received if sent by confirmed fax in each
case addressed to the address of the party indicated herein.
5.6 Governing Law; Jurisdiction. This Agreement is made in accordance
with and shall be governed and construed under the laws of the State of
California, as applied to agreements executed and performed entirely in
California by California residents and in no event shall this Agreement be
governed by the United Nations Convention on Contracts for the International
Sale of Goods. In any legal action relating to this Agreement, each party agrees
(a) to the exercise of jurisdiction over it by a state or federal court in Santa
Clara or San Mateo County, California; and (b) that if such party brings the
action, it shall be instituted in one of the courts specified in subsection (a)
above.
5.7 Export Administration and U.S. Government Rights.
(a) Export Control. Customer acknowledges that the laws and
regulations of the United States restrict the export and re-export of the
Products. Customer agrees that it will not export or re-export the Products or
media in any form without first obtaining the appropriate United States and
foreign government approval. Customer hereby agrees to comply with the
requirements of the U.S. Foreign Corrupt Practices Act (the "Act") and shall
refrain from any payments to third parties which would cause Objectivity or
Customer to violate the Act.
(b) U.S. Government End Users. The Products are a "commercial
item," as that term is defined at 48 C.F.R. 2.101 (OCT 1995), consisting of
"commercial computer software" and "commercial computer software documentation,"
as such terms are used in 48 C.F.R. 12.212 (SEPT 1995) and is provided to the
U.S. Government only as a commercial end item. Consistent with 48 C.F.R. 12.212
and 48 C.F.R. 227.7202-1 through 227.7202-4 (JUNE 1995), all U.S. Government End
Users acquire the Products with only those rights set forth herein.
5.8 Entire Agreement; Severability and Waiver. This Agreement
constitutes the entire agreement between the parties and supersedes all previous
agreements or representations, written or oral, with respect to the Products,
the services specified herein, and the licensing and providing of service under
this Agreement. Objectivity shall not be bound by any additional provisions in
any order, release, acceptance or other written correspondence from Customer
unless expressly agreed to in writing. All provisions of the Agreement shall be
and remain in full force and effect with respect to its subject matter. In the
event any provision of this Agreement is held to be invalid or unenforceable,
the valid or enforceable portion thereof and the remaining provisions of this
Agreement will remain in effect. Any waiver (express or implied) by either party
of any breach of this Agreement shall not constitute a waiver of any other or
subsequent breach. Amendments to this Agreement must be in a writing signed by
duly authorized representatives of Objectivity and Customer.
5.9 Nonassignability and Binding Effect. Except in connection with the
sale of all or substantially all of Objectivity's assets or business (by merger
or otherwise), any attempted assignment of the rights or delegation of the
obligations under this Agreement shall be void without the prior written consent
of the nonassigning or nondelegating party. In the case of any permitted
assignment or transfer of or under this Agreement, this Agreement or the
relevant provisions shall be binding upon, and inure to the benefit of, the
successors, executors, heirs, representatives, administrators and assigns of the
parties hereto.
The parties hereto have each caused this Agreement to be signed and
delivered by its duly authorized representative as of the Effective Date.
OBJECTIVITY, INC. A.B. WATLEY GROUP INC.
By:/s/ David Caplan By:/s/ Leon J. Ferguson
------------------------------- -------------------------------
Printed Name: David Caplan Printed Name: Leon J. Ferguson
Title: President and CEO Title: Senior Vice President and
Chief Information Officer
Effective Date: September 30, 1999 Address:
-----------------------
-----------------------
-----------------------
Phone:(650) 254-7100 Phone:
FAX: (650) 254-7171 FAX:
-----------------------
6
<PAGE>
Attachment C
Objectivity, Inc.
MAINTENANCE AND SUPPORT SERVICES
1. Maintenance and Support. Objectivity shall provide the Maintenance and
Support Services (as defined below), including technical assistance, Updates,
Releases, and Versions. Customer shall comply with the obligations set forth for
all periods during which Customer receives Maintenance and Support Services.
Only one support offering can be selected per customer application. Customer
order shall indicate Objectivity support offering purchased.
2. Definitions. The following are defined terms:
a) "Maintenance and Support Services" for the Products shall mean those services
related to consulting, installation and support to be provided by Objectivity
to Customer (but not to any Distributor, End User, or other third party).
b) "Object Code" shall mean the machine-readable computer code which enables the
computer to execute the programming instructions that comprise the Products
or any Update, which is derived from the Source Code by a process generally
referred to as compiling, and which may be stored in a variety of formats on
magnetic media or other suitable media.
c) "Objectivity-Supported Configurations" shall mean hardware platform types,
operating system types and their releases, network types and their releases,
compilers, tools and their respective releases then supported by Objectivity.
d) "Product or Products" shall mean (i) the Objectivity computer software
program or programs in Object Code only, (ii) Updates, Releases, and Versions
as may be made available from time to time by Objectivity, and (iii) the User
Documentation, whether in printed or machine readable form.
e) "Release" shall mean any modification of a Product for which Objectivity, in
its sole discretion, adds minor new functionality to the Product and is
indicated by a change in the number to the right of the first decimal point
in the Product release number, e.g., a change from release 4.4 to 4.5.
f) "Software Problem" shall mean an error condition that is repeatable and
reproducible and that causes a Product to not function according to the
specifications in the User Documentation (including the specifications in the
User Documentation for all Updates, Releases, or Versions), when properly
installed and operated on Objectivity-Supported Configurations.
g) "Update" shall mean any modification of a Product for which Objectivity, in
its sole discretion, provides maintenance to the Product and is indicated by
a change in a number to the right of the second decimal point in the Product
release number, e.g., a change from Release 4.1.1 to 4.1.2.
h) "User Documentation" shall mean the Objectivity User Manual(s) and other
related written materials regarding the proper installation and use of the
Products and provided for use in connection with the Products.
i) "Versions" shall mean any modification of a Product for which Objectivity
adds major new functions or extensively modifies existing functions of a
Product and is designed by the number to the left of the first decimal point
in the Product version number, e.g., a change from version 3.8 to 4.0.
3. Technical Assistance. Technical assistance shall be performed primarily by
telephone and electronic mail from Objectivity's offices in Mountain View,
California or, if elected by Objectivity in its sole discretion, at Customer's
site. Objectivity shall provide technical assistance to the Customer Support
Contacts for error correction and to advise Customer on the installation,
operation, and maintenance of the Products. If Customer is located outside the
United States, the services shall be provided by Objectivity, an Objectivity
distributor, or other entity designated by Objectivity.
Objectivity Support Offerings - License Customers
-------------------------------------------
Basic Standard Premium(1) 24x7(2)
-------------------------------------------
- --------
1 Premium support is only available if the Customer has purchased Standard
support.
8
<PAGE>
Attachment C
- --------------------------------------------------------------------------
Support via email X X
- --------------------------------------------------------------------------
Support via 800 number X
(6:00am-6:00pmPST)
- --------------------------------------------------------------------------
Web access to support database, X
tips and tools
- --------------------------------------------------------------------------
Dedicated support representative X
- --------------------------------------------------------------------------
Patches for critical problems X
- --------------------------------------------------------------------------
Response time 48hr 48hr 24hr 1hr
- --------------------------------------------------------------------------
New versions of licensed X X
software when available
- --------------------------------------------------------------------------
Technical bulletins X X
- --------------------------------------------------------------------------
Pre-deployment review X X
- --------------------------------------------------------------------------
Customer application part of X
Objectivity QA
- --------------------------------------------------------------------------
On-site support (1 per quarter, X
customer pays expenses)
- --------------------------------------------------------------------------
24x7 critical service support(3) X
- --------------------------------------------------------------------------
4. Customer Support Contact. "Customer Support Contact" means a maximum of two
(2) individuals specified by Customer in writing to be support contacts.
Customer may change the names on this list at any time, by written notice to
Objectivity. All Maintenance and Support Services will be provided only through
the Customer Support Contacts.
5. Updates, Releases, and Versions. In the event Objectivity, in its sole
discretion, makes generally commercially available an Update, Release, or
Version for one or more of the Products, then on Customer's request if Customer
is then receiving Maintenance and Support Services, Customer shall receive one
(1) free copy of the Update, Release or Version of the Products for each copy of
the Products covered by a maintenance agreement with Objectivity.
6. Media. Delivery of Updates, Releases and Versions shall be provided in
machine readable form on either magnetic tape or compact disk.
7. Customer's Obligations. Customer shall provide notice (with written or
electronic confirmation) to Objectivity of any Software Problem, including, but
not limited to, descriptions or examples of a Software Problem in the form
requested by Objectivity. Customer shall provide all reasonable assistance to
Objectivity, including any supporting materials requested by Objectivity, in
duplicating and/or correcting the Software Problem.
8. Objectivity's Obligations.
a. General. Objectivity will use its reasonable best efforts, according
to the response objectives set forth herein, to provide a resolution to Software
Problems brought to its attention by written notice by Customer that can be
duplicated by Objectivity. Such Software Problem resolutions will consist of
either (i) a direct solution to the Software Problem, including appropriate
release notes or changes to the documentation, or (ii) a procedural workaround
that provides a satisfactory solution to the Software Problem. Following
duplication of any Software Problem, Objectivity will provide Customer with an
estimate of how long it will take to resolve the Software Problem and will keep
Customer informed of the progress of the resolution of the Software Problem.
b. Definitions. The response time objectives are based upon
Objectivity's standard Software Performance Report ("SPR") definitions as
follows:
(1) "Critical". The Product is not usable. Data corruption or
system crashes are certain. No procedural workaround exists. Work on this level
Software Problem pre-empts all other lower priority problems.
(2) "Serious". The Product is usable with severe limitation.
Data corruption or system crashes are possible. No effective procedural
workaround exists.
(3) "Moderate". The Product is usable with moderate limitation
because minor features are affected. There is no data corruption, system crashes
or loss of production. A procedural workaround exists.
(4) "Low". The Product is usable, but has some usability
(cosmetic) problems. There is no data corruption, system crashes or loss of
production. Cosmetic errors exist in the User Documentation.
(5) "Enhancement". No Software Problem exists. The Product is
usable, functions as documented, but could benefit from modification.
c. Response Objectives. Objectivity will use reasonable best efforts to
provide a resolution to Software Problems, as provided in Section 8(a) above,
within the elapsed time objectives described below:
(1) Critical Software Problems.
a) Immediate person to person contact.
b) If no resolution within two (2) hours than
escalate to Senior Engineer.
c) If no resolution within four (4) hours than
escalate to Management.
d) Continuous activity until problem is resolved. In
addition, updates and status reports.
(2) Serious Software Problems. Five (5) business days from
Objectivity's duplication of the Software Problem;
(3) Moderate Software Problems. Six (6) calendar months from
Objectivity's duplication of the Software Problem;
- --------------------------------------------------------------------------------
2 24x7 support is only available if the Customer has purchased Standard support.
3 Only available for applications which have been deployed.
9
<PAGE>
Attachment C
(4) Low Software Problems. Provided solely at Objectivity's
discretion; and
(5) Enhancement. Provided solely at Objectivity's discretion.
9. Limitations on Maintenance Coverage.
a. General. Objectivity has no obligation to provide Maintenance and
Support Services under this Agreement for:
(1) Products which have been altered or modified by anyone
other than Objectivity;
(2)Software Problems which arise as a result of Customer's
negligence or fault,;
(3) Products used on configurations other than
Objectivity-Supported Configurations; and
(4) Products for which Customer has terminated Maintenance and
Support Services pursuant to Section 9(c) herein.
b. Support Limitation. Objectivity's Maintenance and Support Services
obligations are limited to the current Release and the prior Release of the
Products, with prior Release being supported for minimum of eighteen (18) months
from current Release of the Products.
c. Termination.
(1) Customer may cancel all or less than all Maintenance and Support
Services at any time upon ninety (90) days prior written notice to Objectivity
and Objectivity shall be entitled to receive and shall not be required to refund
any fees or other amounts received by Objectivity for any term during which
Customer elects cancellation. Termination shall be effective at the end of the
then-current annual maintenance period. Customer shall pay any accrued charges
incurred prior to the effective date of termination.
(2) Objectivity shall have the right to cancel Maintenance and Support
Services upon thirty (30) days prior written notice to Customer in the event
that Customer fails to pay annual support fees as due. Customer may cure a
default by making payment during such thirty (30) day notice period.
(3) Termination of Maintenance and Support Services by Objectivity or
Customer for less than all of the Products shall have no effect on Maintenance
and Support Services for the remainder of the Products.
d. Miscellaneous. Objectivity will provide Maintenance and Support
Services for the Products, and will assist Customer in debugging applications
which use the Products if the problems faced by Customer are caused by an
Update, Release or a Version.
10. Fees. The fees for Maintenance and Support Services shall be as set forth in
the any Exhibit to the Agreement. Such fees are subject to change by Objectivity
after the first anniversary of the Effective Date, upon at least thirty (30)
days written notice. Annual increases will not exceed five percent (5%) per
year.
11. Reinstatement. Reinstatement of lapsed Maintenance and Support Services
shall be permitted. If reinstatement of lapsed Maintenance and Support Services
occurs, a reinstatement fee of 1.5 times the current maintenance fee will be
charged for the lapsed period(s).
THIS SPACE INTENTIONALLY LEFT BLANK
10
<PAGE>
Attachment C
EXHIBIT C: SOURCE CODE ESCROW
Contract Reference No.: ___________
SECTION 1. DEFINITIONS
1.1 "Escrow Materials" shall mean the Source Code for the Products set
forth in Exhibit A, Section 1.
1.2 "Event of Default" shall mean the existence of any one or more of
the following circumstances, uncorrected for more than sixty (60) days:
a. Failure by Objectivity to provide Maintenance and Support
Services for Products for a period of sixty (60) days after the date of a
written request from A.B. Watley Group Inc. ("A.B. Watley") for such Maintenance
and Support Services. For the purposes of this Agreement, such failure shall
mean a gross and material failure to provide the Maintenance and Support
Services set forth in Section 3 of the Agreement;
b. Entry of an order for relief under Title 11 of the United
States Code;
c. The making by Objectivity of a general assignment for the
benefit of creditors;
d. The appointment of a general receiver or trustee in
bankruptcy of Objectivity's business or property; or
e. Action by Objectivity under any state insolvency or similar
law for the purpose of its bankruptcy, reorganization or liquidation.
Such circumstances shall be deemed to be corrected and not an Event of
Default if, within the above-referenced sixty (60) day period, Objectivity
(including its receiver or trustee in bankruptcy) provides to A. B. Watley
adequate assurances, reasonably acceptable to A. B. Watley, of its continuing
ability and willingness to continue to supply the Products to A. B. Watley.
SECTION 2. RIGHT TO RECEIVE ESCROW MATERIALS; LICENSE
2.1 Escrow. Upon the effective date of this Agreement, Objectivity
agrees to notify National Safe Depository (the "Escrow Agent") that A. B. Watley
is a "Designated Licensee" as defined in the Software Deposit Agreement between
Objectivity and the Escrow Agent. Upon an Event of Default, A. B. Watley shall
have the right to obtain a copy of the Escrow Materials from the Escrow Agent.
A. B. Watley's written request for the Escrow Materials shall contain an
affidavit signed by an officer of A. B. Watley setting forth the facts
indicating that an Event of Default has occurred and that A. B. Watley is
thereby entitled to a copy of the Escrow Materials held in escrow. A copy of
such written request shall be served upon Objectivity at the same time it is
delivered to the Escrow Agent.
2.2 License. If the Escrow Materials are released to A. B. Watley
pursuant to Section 2.1 above, Objectivity shall grant to A. B. Watley a
non-exclusive, nontransferable right and license to reproduce, modify, and use
such Escrow Materials for its internal business purposes only during the term of
this Agreement or such shorter period during which an Event of Default is in
existence.
WHEREFORE, duly authorized representatives of the parties have executed
this Exhibit C as of the dates set forth below.
OBJECTIVITY, INC. A.B. WATLEY GROUP INC.
By:/s/ David Caplan /s/ Leon J. Ferguson
--------------------------------- ------------------------------------
David Caplan Leon J. Ferguson
- ------------------------------------ ------------------------------------
Printed Name Printed Name
Senior Vice President
President-Chief Executive Officer and Chief Information Officer
- ------------------------------------ ------------------------------------
Title Title
September 30, 1999 September 30, 1999
- ------------------------------------ ------------------------------------
Effective Date Date
11
<PAGE>
Attachment C
12
<PAGE>
A. B. WATLEY GROUP Inc.
EXHIBIT A
This Exhibit A is attached to the Agreement and specifies the products
licensed, quantities, license fees, specific locations of licenses, license
restrictions, maintenance and support fees, and payment terms under which
Objectivity shall deliver Products to Customer and Customer shall pay
Objectivity for such Products.
SECTION 1. PRODUCTS TO BE REPRODUCED AND USED BY CUSTOMER:
(a) All Current Objectivity/DB products
SECTION 2. SPECIFIC DEVELOPMENT AND RUN-TIME RESTRICTIONS: (Application which
internally embeds Objectivity Products)
2.1 Product Name: A. B. Watley On-Line Financial Trading
Application.
2.2 Product Description: A. B. Watley's On-Line Financial Trading
Application is a distributed server architecture, service
bureau application which is accessed via the internet from a
base of subscribed users using a browser based application.
These users are a combination of A. B. Watley employees and
other on-line traders.
2.3 Development and Deployment Restrictions: The development and
runtime licenses are granted for the A. B. Watley application
to utilize Objectivity software in an environment which
complies with all of the following conditions:
(a) Product Hardware Platforms: Intel and Solaris Sparc
(b) Term of Product Usage: A four (4) year term,
unlimited use license of all current Objectivity/DB
products. This license is granted for both the
development and runtime environment of the specified
application.
(c) Unlimited use license for unlimited processors and
developers.
A. B. Watley, Inc. Objectivity, Inc.
Exhibit A Confidential
Page 1
<PAGE>
SECTION 3. FEES AND INITIAL ORDER:
The following specifies the license fees for the above products as well as the
related maintenance and support services selected by Customer. This order is
non-cancellable, non-refundable, and non-contingent. Customer agrees to pay the
following fees within thirty (30) days of invoice date:
Fee
---
3.1 Product
-------
Four (4) Year Term, $1,000,000
Unlimited Use License
For the first four (4) years of Customer's use of the Products (the "Initial
Term"), Customer shall have an unlimited use license for unlimited processors
and developers. Thereafter, unless Customer exercises one or more of the options
set forth below, Customer shall have a perpetual license to use the Products for
the number of processors and developers using the Products at the end of the
Initial Term. Not less than thirty (30) days prior to the end of the Initial
Term, Customer shall have the option to notify Objectivity that Customer wishes
to increase the number of processors and developers using the Products for the
following year. If Customer exercises such option, Customer shall pay
Objectivity $333,333.33 (the "Increase Fee") for the right to so increase usage.
Customer shall have the right, on an annual basis for two (2) years thereafter
(ie. the sixth and seventh years after execution of the Agreement) to increase
the number of processors and developers using the Products in each of such years
upon payment of the Increase Fee for each such year for which the option is
exercised. Customer's failure to exercise its option for a specific year shall
not negate its option for one or more of the other option years (i.e. failure to
exercise the option for year 5 shall not negate the options for years 6 and 7).
Notice of exercise of the option for years 6 and/or 7 shall be given by
Customer not less than thirty (30) days prior to the end of the year in
question. Customer shall have a perpetual license to use the Products for the
number of processors and developers using the Products at the end of year 7 of
this Agreement.
3.2 Maintenance and Support
Maintenance and Support Fees are payable annually in advance. The
annual Maintenance and Support Fee is ten percent (10%) of above
license fee plus a 24 x 7 fee of Fifty Thousand Dollars ($50,000).
Customer has selected 24 x 7 support services as described on
Attachment A. Maintenance fees for years five, six and seven will be
calculated as 10% of the above license fee plus 10% of new license fees
purchased during years five, six and seven. (For example, in year five
maintenance and support fees would be $100,000 plus $50,000, plus
$33,000 for a total of $183,000. If no new licenses are purchased,
maintenance fees would remain at $150,000 per year.)
Initial Annual Support Fee $ 100,000
24 x 7 Support Fee (effective January 1, 2000) 50,000
Total Initial Order: $1,150,000
The above Initial Order will be paid as follows:
October 31, 1999 $550,000
January 1, 2000 50,000
January 31, 2000 550,000
----------
$1,150,000
SECTION 4. MARKETING COOPERATION. Future inclusion and exclusion of "Built On
Objectivity" materials in Customer's public relations, marketing,
communications, advertising and product pieces, is subject to prior written
mutual approval.
A. B. Watley, Inc. Objectivity, Inc.
Exhibit A Confidential
Page 2
<PAGE>
SECTION 5. OBJECTIVITY TRADEMARKS. For purposes of this Agreement, Objectivity
Trademarks shall mean the following:
i. Objectivity(R)
ii. Objectivity/DB(R)
WHEREFORE, duly authorized representatives of the parties have executed
this Exhibit A as of the dates set forth below.
OBJECTIVITY, INC. A.B. Watley Group Inc.
By:/s/ David Caplan /s/ Leon J. Ferguson
--------------------------------- ------------------------------------
David Caplan Leon J. Ferguson
- ------------------------------------ ------------------------------------
Printed Name Printed Name
Senior Vice President
President-Chief Executive Officer and Chief Information Officer
- ------------------------------------ ------------------------------------
Title Title
September 30, 1999 September 30, 1999
- ------------------------------------ ------------------------------------
Effective Date Date
A. B. Watley, Inc. Objectivity, Inc.
Exhibit A Confidential
Page 3
<PAGE>
RESELLER NETWORK LICENSE ORDER FORM
<TABLE>
<S> <C>
Alliance Member Name: Database Consultants Inc. Technical Contact: Doug Kemezy
Alliance Member Location: 4835 LBJ Freeway Phone: (972) 392-0955
Suite 900 Fax: (972) 490-9439
Dallas, TX 75244
Customer Name: Internet Financial Services Inc. Technical Contact: Leon Ferguson
Customer Location: 100 Allentown Parkway Phone: (972) 359-6390
Suite 110
Allen, TX 75002
</TABLE>
ORACLE CONTRACT INFORMATION
Customer Agreement: Shrinkwrap
Agreement Name: Shrinkwrap
================================================================================
This Network License Order Form and Attachment(s) ("Order Form") are placed in
accordance with the agreement specified above ("Agreement").
Customer hereby orders the Program licenses described herein for use in the
United States, unless otherwise specified.
The "Network" is defined as any number of Computers of the Designated Systems
listed in this Order Form, except for Computer-based or Processor-based licenses
or other similar licenses as specified herein.
This Order Form is subject to Oracle's approval granting Database Consultants
Inc. the one-time right to grant the license rights stated herein.
================================================================================
1. DESIGNATED SYSTEM(S)
Make/Model: Sun Spare Make/Model: Intel
Operating System: Solaris Operating System: Linux
Media: CD Media: CD
Make/Model: PC Compatible Make/Model: Intel
Operating System: Windows NT Operating System: Solaris
Media: CD Media CD
<PAGE>
<TABLE>
<CAPTION>
Per User Licenses:
Description Quantity License Level License Type List License Fee Net License Fee
- ------------------------------------- -------- ------------- ------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Oracle8i Enterprise Edition 20 Full Use Named User $18,700.00 $10,285.00
Application Server Enterprise Edition 20 Full Use Named User $2,500.00 $1,375.00
Parallel Server Option 20 Full Use Named User $7,500.00 $4,125.00
Diagnostic Pack 20 Full Use Named User $1,200.00 $660.00
Tuning Pack 20 Full Use Named User $1,200.00 $660.00
Change Management Pack 20 Full Use Named User $1,200.00 $660.00
</TABLE>
<TABLE>
<CAPTION>
Per Computer Licenses:
Description Quantity License Level License Type List License Fee Net License Fee
- ------------------------------------- -------- ------------- ------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Oracle81 Enterprise Edition 36 Web Specific Processor $1,722,240.00 $947,232.00
Oracle81 Enterprise Edition 36 Hot Backup Processor $430,560.00 $236,808.00
Application Server Enterprise Edition 4 Web Specific Processor $24,960.00 $13,728.00
Parallel Server Option 16 Web Specific Processor $304,640.00 $167,552.00
Parallel Server Option 16 Hot Backup Processor $76,160.00 $41,888.00
Diagnostic Pack 36 Web Specific Processor $109,440.00 $60,192.00
Tuning Pack 36 Web Specific Processor $109,440.00 $60,192.00
Change Management Pack 36 Web Specific Processor $109,440.00 $60,192.00
</TABLE>
Per User Net Fee: $17,765.00
Per Computer Net Fee: $1,587,748.00
Net License Fee: $1,605,549.00
Education Fee: $54,000.00
# of Education Units: 150
Initial Year Annual Technical Support Fee: $338,520.00
Technical Support Type: Silver
Total Fees: $1,998,069.00
<PAGE>
B. GENERAL TERMS
1. Technical Support. Annual Technical Support services ordered by Customer will
be provided under Oracle's Technical Support Policies and pricing in effect on
the date Technical Support is ordered and shall be effective upon shipment (or
upon Order Form Effective Date for products not requiring shipment); first year
Technical Support is quoted above, if ordered. Fees for Technical Support are
due and payable annually in advance.
Customer estimates it will deploy Program licenses ordered hereunder over a
period of two (2) years. In light of this, for the fees below Customer may
receive annual Silver Technical Support for Program licenses ordered hereunder
(except for license grants modified or added hereto after the Effective Date, or
for which Technical Support is not available). Technical Support consists of
Updates for such licenses as well as support services, pursuant to the Technical
Support Policies in effect, as such licenses are deployed. Technical Support
fees shall be paid annually in advance. After the Support Years below, Customer
may obtain Technical Support under Oracle's Technical Support fees in effect at
the time of order.
Support Year Technical Support Fee
------------ ---------------------
First Year $338,520.00
Second Year $416,640.00
Third Year $520,800.00
2. Miscellaneous. Customer acknowledges that Oracle has delivered to the
Customer Location, for use in the U.S., 1 copy of the software media ("Master
Copy") and 1 set of Documentation (CD-ROM or bound, whichever is generally
available) for each Program currently available in production release as of the
Effective Date for use on the Designated System types. Customer shall have the
right to make up to 1 copy of the Program(s), including Documentation, for each
license of the Program(s) and the Customer shall be responsible for installation
of the software. All fees under this Order Form shall be due and payable net 30
days from date of invoice, and shall be non-cancellable and the sums paid
nonrefundable. Customer agrees to pay applicable sales/use tax, media and
shipping charges. If Customer loses or damages the media containing a Program
licensed hereunder, upon Customer's written notice Oracle will provide a
replacement copy thereof, under Oracle's then-current Technical Support
policies, for a media and shipping charge. The following shipping terms shall
apply: FOB Destination, Prepaid, and Add. These terms shall also apply to any
options exercised by Customer. Oracle may refer to Customer as a customer in
sales presentations, marketing vehicles and activities.
C. OTHER
1. Additional Designated Systems. Until two (2) years from the Effective Date,
Customer shall have the option to add one (1) additional Designated System(s)
types ("Additional Designated System(s)") to this Order Form at no charge, if:
(i) the Programs licensed herein are available in production release status on
the Additional Designated System at the time Customer elects to add the
Additional Designated System; and (ii) Customer has continuously maintained
Technical Support for such Programs.
<PAGE>
Oracle shall ship to the Customer Location a single Master Copy of the Programs
licensed herein for the Additional Designated System added. These Programs may
only be copied and installed in accordance with the terms of this Order Form;
Oracle has no further shipment obligation other than as specified above.
Programs licensed herein for use on Additional Designated System(s) may not be
currently available. Customer has not relied on potential availability in
entering into the payment obligations in this Order Form. Oracle is under no
obligation to change current availability.
2. Web Specific. "Web Specific Program(s)" shall mean Full Use Program licenses
which may only be accessed by Clients via Internet networking protocols at no
charge or fee, including, without limitation any license fees, subscriber fees,
toll fees, time-based charges or other such charges. Customer may only allow
third party web access to the Web Specific Programs for viewing, querying, or
adding data only, and provided that such use is in accordance with the other
terms of this Order Form. Web Specific Programs ordered hereunder are only for
use by an uncountable number of Customer's external internet users, and shall
not used through an intranet or for use by Customer internally. The Designated
System shall only run on one platform type.
3. Hot Backup. In consideration for the hot backup fees specified in this
Network License Order Form, with respect to each of the Program licenses ordered
under this Order Form, Customer shall have the right to install and use such
Programs on a backup computer of the same make and model as the Designated
System type for the purpose of temporary disaster recovery and testing. Customer
shall have the right to maintain a "hot" or "live" copy of the Programs on such
backup computer at all times for immediate production use only in the case of a
primary computer malfunction that renders the Programs inoperable on the
applicable Designated System type. At no time shall Customer have the right to
use the Programs on the Designated System type and the backup computer
simultaneously.
4. Additional License Increments. For two (2) years from the Effective Date,
provided Customer has continuously maintained Technical Support, Customer may
increase the quantity of each applicable License Type accessing the Programs on
this Order Form ("Additional License Increment") by paying Oracle an additional
license fee. The license fees shall be at the discounts specified below off
Oracle's applicable price list in effect as of the Effective Date.
<TABLE>
<CAPTION>
Additional License Fee per each
Program License Type License level License Increment Additional License Increment
- ------- ------------ ------------- ----------------- ----------------------------
<S> <C> <C> <C> <C>
Oracle8 Enterprise Edition Processor Web Specific 1-15 Processors $26,312.00
Oracle8 Enterprise Edition Processor Web Specific 16-30 Processors $22,484.00
Oracle8 Enterprise Edition Processor Web Specific 31+ Processors $19,136.00
Application Server EE Processor Web Specific 1-15 Processors $ 3,432.00
Application Server EE Processor Web Specific 16-30 Processors $ 2,932.00
Application Server EE Processor Web Specific 31+ Processors $ 2,496.00
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Parallel Server Option Processor Web Specific 1-15 Processors $10,472.00
Parallel Server Option Processor Web Specific 16-30 Processors $ 8,948.00
Parallel Server Option Processor Web Specific 31+ Processors $ 7,616.00
Diagnostic Pack Processor Web Specific 1-15 Processors $ 1,672.00
Diagnostic Pack Processor Web Specific 16-30 Processors $ 1,429.00
Diagnostic Pack Processor Web Specific 31+ Processors $ 1,216.00
Tuning Pack Processor Web Specific 1-15 Processors $ 1,672.00
Tuning Pack Processor Web Specific 16-30 Processors $ 1,429.00
Tuning Pack Processor Web Specific 31+ Processors $ 1,216.00
Change Management Pack Processor Web Specific 1-15 Processors $ 1,672.00
Change Management Pack Processor Web Specific 16-30 Processors $ 1,429.00
Change Management Pack Processor Web Specific 31+ Processors $ 1,216.00
</TABLE>
Each order placed for Additional License Increments must be at least $10,000 in
net license fees; applicable sales tax will be added to the fee. All applicable
fees shall be due and payable on the date that Customer notifies Oracle in
writing of its exercise of this opinion; Oracle has no shipment obligation. Upon
election, this payment obligation is non-cancellable, and the sum paid is
nonrefundable.
At the time of election, Customer must be current on its Technical Support
payments and Customer may obtain Silver Technical Support services from Oracle
for an Additional License Increment ordered pursuant to this option at Oracle's
applicable Technical Support fees specified above. During the two (2) year
period specified in this Section, Technical Support shall be provided pursuant
to Oracle's policies in effect as of the Effective Date. Thereafter, Customer
may obtain Technical Support services from Oracle under Oracle's applicable
Technical Support fees and policies in effect when such services are ordered.
5. Joint Marketing Efforts. In consideration for the license fees paid
hereunder, Oracle agrees that it shall undertake to provide some combination of
the following types of marketing opportunities to Customer:
a) Public Relations: Jointly promote success through public relations
activities such as press releases, press referenceability for editorial
visits with market watchers, inclusion in corporate speeches etc.,
subject to both Oracle and Customer jointly agreeing on target media.
b) Marketing: Oracle at Works (success story collateral).
: Video testimonial.
: Possible inclusion in Oracle's applications magazine,
Profit magazine.
<PAGE>
: Reference on Oracle web sites. We will put the Oracle
at Works collateral on the www.oracle.com web site.
: Product demo at the Financial Services Solution
Centers in New York, London or Singapore.
: Use of Oracle Logos (Logo of Oracle's choosing on the
Customer's web site, subject to Oracle approval.)
c) Conferences and Trade Shows:
: Host Customer in Oracle-sponsored technology venues,
such as Oracle Open World, Oracle Application User
conference (OAUG), ISeminars, and product conferences
such as BAI Retail Delivery and emerging Ecommerce
conferences
The Alliance Member and Customer agree that the terms in this Order Form shall
not be disclosed without prior written consent of the other party. This quote is
valid through May 28, 1999 and shall become binding upon execution by the
Alliance Member and Customer.
DATABASE CONSULTANTS INC. INTERNET FINANCIAL SERVICES INC.
Signature: /s/ Doug Kemezy Signature: /s/ Leon J. Ferguson
------------------------ ------------------------
Name: Doug Kemezy Name: Leon J. Ferguson
---------------------------- ----------------------------
Title: Territory Manager Title: CIO
--------------------------- ---------------------------
Effective Date: 5/26/99
-------------------
<PAGE>
We consent to the use of our report dated November 22, 1999, with respect to the
consolidated financial statements and schedules of A.B. Watley Group Inc.
included in this Annual Report (Form 10-KSB) for the year ended September 30,
1999.
/s/ Ernst & Young LLP
New York, New York
December 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 9,298,822
<SECURITIES> 214,381
<RECEIVABLES> 626,288
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,653,244
<PP&E> 10,852,956
<DEPRECIATION> 1,183,774
<TOTAL-ASSETS> 23,244,954
<CURRENT-LIABILITIES> 3,657,755
<BONDS> 0
0
0
<COMMON> 7,932
<OTHER-SE> 15,835,055
<TOTAL-LIABILITY-AND-EQUITY> 23,244,954
<SALES> 20,987,613
<TOTAL-REVENUES> 20,987,613
<CGS> 21,231,139
<TOTAL-COSTS> 13,956,407
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 348,457
<INCOME-PRETAX> (591,983)
<INCOME-TAX> 32,494
<INCOME-CONTINUING> (624,477)
<DISCONTINUED> 0
<EXTRAORDINARY> 177,125
<CHANGES> 0
<NET-INCOME> (801,602)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
